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How You Can Earn An 18% Yield with This Share

Back at the start of 2005, Second Chance Properties (SGX: 528) was worth a split-adjusted S$0.188 per share.

For an investor who bought shares of the company, which is involved with property investments and gold and Malay-fashion retailing, he would have gotten a really attractive yield-on-cost of 8.5%; Second Chance Properties had paid out a split-adjusted dividend of S$0.016 per share for its investors for the financial year ended 30 June 2005.

But here’s where it gets exciting. Fast forward to today, and we see Second Chance Properties paying out a dividend of S$0.034 per share for its last completed financial year, giving the investor who bought into it back in 2005 an incredible yield-on-cost of 18%.

For me, Second Chance’s dividend history highlights one very important fact about dividends that investors sometimes miss – for future income, it’s the growth in dividends that matter, not its current yield.

While Second Chance did give its early investors a great dividend yield back in 2005, the company had managed to grow its dividends by a compounded annualised rate of 9.9% since, which has helped build the attractive yield-on-cost based on its share price at the start of 2005.

Financial year ended

Dividends per share for Second Chance

Yield-on-cost based on share price of S$0.188 at the start of 2005

June 2005

S$0.016

8.5%

June 2006

S$0.0192

10.2%

June 2007

S$0.0216

11.5%

June 2008

S$0.024

12.8%

June 2009

S$0.028

14.9%

June 2010

S$0.0304

16.2%

June 2011

S$0.032

17.0%

August 2012

S$0.0326

17.3%

August 2013

S$0.034

18.1%

Source: S&P Capital IQ

The blue chip share Jardine Matheson Holdings (SGX: J36) is another great example of how growing dividends can help build great streams of future income, this time with a starting yield that was somewhat pedestrian.

The conglomerate’s shares were priced at US$9.10 each at the start of 2004 and investors would have received a yield-on-cost of ‘only’ 3.6% when the company paid out US$0.33 per share in dividends for 2004. Over the years, its dividends grew by a compounded rate of 16.9% per year to hit US$1.35 per share in 2012, giving its shares a great yield-on-cost of 14.8%.

Shares of the conglomerate are now priced at US$57.70 each, with a historical yield (based on its dividends for 2012) of 2.3% only. That’s lower than the Straits Times Index’s (SGX: ^STI) yield of around 2.8% and would likely not raise any sense of excitement at all among investors looking for nice yields.

I’m not making any sort of recommendations, but here’s an interesting thought experiment. Let’s assume that Jardine Matheson Holdings, a company with substantial interests in other growing blue chips like Jardine Strategic Holdings (SGX: J37) and Jardine Cycle & Carriage (SGX: C07), can grow its dividends at only 10% per year for the next 10 years. So, with a dividend of US$1.35 per share in 2012, the company would have a dividend of US$3.50 per share by 2022, translating into a yield-on-cost of 6% then.

A 6% yield-on-cost after 10 years might not seem like much. But what happens after 20 years? Dividends growing at 10% a year for 20 years at Jardine Matheson Holdings would result in a dividend per share of US$9.08 per share by 2032, resulting in a yield-on-cost of 15.7%.

Such a dividend strategy could hardly constitute as being an exciting one, given how investors must have patience in order to get a glimpse of the big payday a decade or two later. But, having that requisite patience to allow compounding to work its magic for long stretches of time is what can give an investor the chance for a great income stream in the future.

At the very least, the historical performance of shares like Second Chance Properties and Jardine Matheson Holdings are evidences of how investors who are looking to build an income portfolio for the future shouldn’t be out hunting for a big yield today. Instead, it’s about investors looking for a company that has a good chance of compounding its dividends over time.

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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 in Second Chance Properties.