How to Find Great Dividends While Relaxing By the Coast

Fans of Twitter will know that each tweet is made out of a maximum of 140 characters (incidentally, Motley Fool Singapore has a Twitter account too!). So, when you come across advice on dividend investing which is summarized in a single tweet, you know that it does not come much simpler than this.

Go on, tell me more

Eddy Elfenbein, an investment writer and analyst, has been publishing his “buy list” on his blog every year for the past eight years. What’s interesting is that his list of investments has beaten the S&P 500 (a broad share market index in the USA) for seven straight years by observing a simple formula: Buying outstanding companies and holding for long periods of time. At last count, the total returns of his buy list clocks in at 124.76% vs. the S&P 500’s returns of 75.6%.

Recently, Mr. Elfenbein published a simple tweet on how to screen for dividend paying shares:

In a single tweet, he tried to convey two important characteristics on the kind of bargain-priced outstanding companies he looks for:

a) A 3% yield might indicate that a company is selling on the cheap

b) A company with negligible or little debt may indicate that the company is well run

Awesome, let’s test this screen out on the SGX

With the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI), now offering a distribution yield of 3.98%, it may make sense to bump up the hurdle for the distribution yield to 4% and see where this takes us in Singapore’s share market.

To screen for debt, we can use a strict long term debt to equity ratio of 0%, which is what I had used.

Sheng Siong Group Ltd (SGX: OV8) and Nera Telecommunications Ltd. (SGX: N01) were two particular companies which made it through the list:

Company Dividend yield Debt
Sheng Siong 4.2% No debt
Nera Telecommunications 7.8% No debt

Source: Google Finance, company annual reports and financials

Popular grocery retailer Sheng Siong has 33 of its namesake outlets around Singapore. As of the quarter ended 30 June 2014, it has pulled in $709 million in revenue on a trailing twelve months basis and has a balance sheet of $96.5 million in cash (and equivalents) and no debt. The company has a total dividend of $0.029 per share on a trailing twelve months basis.

Meanwhile, Nera Telecommunications is involved in a variety of telecommunication and infocomm solutions. The increase in recurring revenues from its point-of-sales payment solution may have helped it build up $29 million in cash and equivalents while carrying on debt. The company has a total dividend of $0.06 per share on a trailing twelve months basis.

There’s a catch though – although both companies have healthy balance sheets, the duo also spot very high pay-out ratios which may leave little room for error.

Foolish take away: do we sit by the seaside now?

As Mr. Elfenbein’s tweet highlighted, this could be the time to sit back and relax. Not everyone has a pool at their void deck, so folks may instead enjoy taking a stroll along the sea in East Coast Park.

But crucially for most Foolish investors, this is not the end of the work to be done.

For the astute investor, the screened names simply represents the starting point for more study to be done. Avid Foolish investors may instead want to dig further, and look at the business behind the ticker.  My colleague Ser Jing also would encourage dividend investors to look at the track record of dividends, payout ratios and free cash flow.

Mr. Elfenbein’s overarching point should not be lost, though. And, that is, whatever element you choose to screen for, the companies should reflect high-quality and a cheap price.

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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 Chin Hui Leong doesn’t own shares in any companies mentioned.