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How To Double Your Dividends in Five years

singapore currencyIf you are looking for fast-growing dividend payers, you shouldn’t need to venture too far from the Straits Times Index (SGX: STI) to find them.

Consider, for example, Singapore conglomerate Keppel Corporation (SGX: BN4). In 2007, its annual payout was S$0.17 per share. Last year, it was S$0.45. That is an increase of 164% over five years. Consider also Hong Kong conglomerate Jardine Matheson (SGX: J36). In 2007 it paid out $0.65 per share. In 2012, that had jumped to S$1.35 for an increase of 108%.

Trouble is companies such as Jardine Matheson and Keppel Corporation never quite set investors’ pulses racing with their dividend yields. Currently, the Hong Kong “Hong” yields a smidgen above 2%, while Keppel Corp’s payout is slightly better – its historic yield is 3.3%.

However, this is handy moment to remind ourselves that we should not go out of our way to chase high-yielding shares simply because they are high yielding. An outstanding yield could easily turn into a mundane one later on. So a payout that might look today may not look that brilliant if it doesn’t grow over time. Growth matters for the long-term investor.

That said, high-yielding shares might still be a good investment. So, don’t dismiss them out of hand. The yield might be abnormally high simply because the share price is unusually low. But you will need to ascertain whether the share price might eventually rise or whether the dividend might eventually be cut.

That can be a tough judgement call. But a useful clue might be found from the company’s dividend track record. Has the company increased its payout steadily over the years?

It might also be instructive to look at the dividend cover. In other words, can the payouts be comfortably met from the profits generated? Of course, dividends can be made from retained earnings too. But a company can’t keep eating food from its pantry without replenishing it because eventually the cupboard will be bare.

So how do you go about looking for shares that can double their payout in five years?

A handy short cut is the Rule of 72. Simply take 72 and divide it by the expected annual dividend growth rate. In the case of Keppel Corporation, it has grown its dividend at around 17% a year. And in the case of Jardine’s was around 14%. So by the Rule of 72, Keppel’s payout could be expected to double in around four years, while Jardine’s could double in about five years.

Those growth rates more than beat the rate of inflation, which has got to be good news. And bear in mind also that where the dividend goes, the share price could eventually follow.

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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 Director David Kuo doesn’t own shares in any companies mentioned.