While all investors would likely have the same objective of maximising the total after-tax returns they can achieve, there are some who are more concerned than others about the income they can obtain from investing.
For such investors, they’re known conveniently as income investors and they have a primary objective of deriving income from their portfolio from dividends that can ideally rise above the rate of inflation.
The usual suspect when it comes to finding solid dividends would be a company’s dividend payout ratio, defined simply by a company’s dividend as a percentage of its earnings. Generally, the lower the payout ratio, the more defensible the company’s dividend is. It’s a useful concept, but does not always paint the best picture for investors.
Dividends are ultimately paid out from the cash that a company has and that is where investors have to look. More specifically, investors have to focus on a company’s free cash flow, or FCF. With ample FCF comes the possibility of bigger dividends.
With that, let’s take a look at three companies that have been growing their dividends because they’ve been generating increasing amounts of FCF.
1. Vicom (SGX: V01), Price: $4.65, PE: 15.3, Dividend Yield: 3.9%
The company’s day job involves the provision of commercial testing and inspection services for a wide range of industries and vehicle owners in Singapore might be familiar with Vicom’s seven vehicle inspection centres scattered throughout the island.
As an inspection company, it only seems fitting that Vicom’s FCF and dividends passes the scrutiny of investors who are inspecting its numbers, as shown in the graph below.
2. ST Engineering (SGX: S63), Price: $3.99, PE: 21.3, Dividend Yield: 4.2%
With a diverse range of engineering services catering to companies in the aerospace, electronics, land systems and marine sectors, the company has not only demonstrated technical excellence but have also displayed financial smarts – ST Engineering’s operations has delivered a growing stream of FCF for shareholders which has more than doubled from 10.7 cents a share in 2008 to 26.1 cents a share last year.
The graph below shows how shareholders in ST Engineering have been rewarded with steadily growing dividends, ranging from a low of 13.28 cents to 16.8 cents.
3. Raffles Medical Group (SGX: R01), Price: $3.06, PE: 28.3, Dividend Yield: 1.5%
Raffles Medical Group operates its eponymous Raffles Hospital, as well as a host of medical centres and dental clinics in Singapore. The company’s not just limited to our island-nation as they run four medical centres in China – three in Hong Kong, and one in Shanghai.
Besides providing health-care for patients that turn up at their hospitals, the company’s been taking care of the financial-health of shareholders’ as well. Shares of RMG have almost doubled from a price of $1.50 at the start of 2008, with the company’s increasing FCF and dividends (seen in the graph below) through the difficult 2008-2009 period likely assuming the role of an ‘accomplice’ in the share price growth.
Foolish Bottom Line
Dividends can make up an important component of long-term share returns. So, don’t short-change yourself as an investor by unduly focusing on the wrong numbers in your hunt for great dividend shares. Look for the cash!
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.