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Want Big Dividends? You Need Time

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Dividends, when properly selected, can be a perpetually growing stream of income and that looks mightily attractive to me. Thing is though, investors can often overlook how powerful an ally time can be in their hunt for big dividends.

While there’s nothing wrong with focusing on a high current dividend yield, I’ll contend that the real focus should be on the future growth of those dividends, and more importantly, having the patience to wait for the big payday to arrive.

How dividends can grow

Here are some figures that can help bring home the point, using conglomerate Jardine Cycle & Carriage (SGX: C07), healthcare provider Raffles Medical Group (SGX: R01), aircraft engineering and maintenance outfit SIA Engineering Company (SGX: S59), and corporate marketing & related services provider Kingsmen Creatives (SGX: 5MZ) as examples.

Company

Price: 17 Dec 2003

Dividends for last completed financial year on 17 Dec 2003

Dividend yield then

Raffles Medical

S$0.355

S$0.0182

5.3%

Kingsmen Creatives*

S$0.107

S$0.00462

4.3%

Jardine C&C

S$5.75

S$0.156

2.7%

SIA Engineering

S$1.88

S$0.045

2.4%

*For Kingsmen Creatives, the dates used were 17 Dec 2004, and not 17 Dec 2003

Source: S&P Capital IQ

While Raffles Medical and Kingsmen had some nice yields a decade ago (nine years, for Kingsmen), the other two shares did not carry particularly tasty dividends. But, this is what their dividends looks like now:

Company

Price: 17 Dec 2003

Dividends for last completed financial year on 17 Dec 2013

Dividend yield on cost

Raffles Medical

S$0.355

S$0.045

12.7%

Kingsmen Creatives*

S$0.107

S$0.04

37.5%

Jardine C&C

S$5.75

S$1.503

26.1%

SIA Engineering

S$1.88

S$0.22

11.7%

*For Kingsmen Creatives, the date used were 17 Dec 2004, and not 17 Dec 2003

Source: S&P Capital IQ

All four shares have grown their dividends substantially and all currently carry high doubled-digit dividend yields based on their original cost basis.

The three key takeaways

For me, this really illustrates three key points that I find important for investors to internalise. One, growth in dividends is important. Two, do not be fixated with high yields in the search for a growing income stream – small dividends from Jardine C&C and SIA Engineering became huge over time as well. Finally, time is of the essence here; these shares did not start off as huge dividend shares nor did they become one overnight.

The four shares took plenty of time – a decade to be precise – to get to where they are today and investors without the requisite patience would not be able to enjoy big yields-on-cost.

Of course, those three takeaways might naturally lead to the question on how investors can find shares that have a high probability of growing their dividends over time.

For every Raffles Medical or Kingsmen Creatives, there’s also a SMRT Corporation (SGX: S53). SMRT, a land-transport operator, was yielding 5.3% a decade ago. But come today, investors’ dividend yield based on their original cost basis has gone down to 4.3%. That’s what happens when a company finds itself being unable to adjust prices despite rising costs, leading to falling profits and ultimately, lower dividends.

Clues for big dividends

For starters, investors could peruse a share’s balance sheet and cash flow statement. Strong balance sheets gives companies major leeway to ride out tough times without sacrificing dividends while adequate free cash flow ensures that dividends come from the right sources, i.e. the cash earned from a company’s daily business activities.

Of course, that’s not all that an investor needs to do – an analysis of a company’s competitive advantages will help here as well – but it serves as a good starting point.

Foolish Bottom Line

On a final note, here’s how the current dividend yields of the four big dividend growers looks like now:

Company

Price: 17 Dec 2013

Dividends for last completed financial year on 17 Dec 2013

Dividend yield now

Raffles Medical

S$3.04

S$0.045

1.5%

Kingsmen Creatives

S$0.90

S$0.04

4.4%

Jardine C&C

S$34

S$1.503

4.4%

SIA Engineering

S$4.80

S$0.22

4.6%

Source: S&P Capital IQ

In particular, Raffles Medical stands out as having a somewhat poor yield, especially when compared with the Straits Times Index’s (SGX: ^STI) yield of 2.74% based on data for the index-tracker SPDR Straits Times Index ETF (SGX: ES3).

Investors chasing high yields might be put off by the healthcare provider’s paltry 1.5% yield. But, remember the three key takeaways? If you think the company has a good chance of growing its dividends like what it has done in the past, then that meagre yield now might become big a decade later.

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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 writer Chong Ser Jing owns shares of Raffles Medical Group and Kingsmen Creatives.