Dividends from shares can be a great source of passive income for investors. And if the choices are made correctly, that paycheque can even increase over time as the companies we’ve invested in grows their businesses. But, how do we make the right choice? Here’re three things to look at which can help: (1) the company’s history of free cash flow and dividends paid; (2) the strength of the company’s balance sheet; and (3) room for growth in the company’s business. The first two factors are important because it shows how much room for error a company has when it…
Dividends from shares can be a great source of passive income for investors. And if the choices are made correctly, that paycheque can even increase over time as the companies we’ve invested in grows their businesses.
But, how do we make the right choice? Here’re three things to look at which can help: (1) the company’s history of free cash flow and dividends paid; (2) the strength of the company’s balance sheet; and (3) room for growth in the company’s business.
The first two factors are important because it shows how much room for error a company has when it comes to paying dividends. Meanwhile, the third point gives investors comfort that a company can continue growing and thus generate higher dividends over time.
Using these three parameters as a test, here’re two shares which scored well.
1. Raffles Medical Group Ltd. (SGX: R01)
Source: S&P Capital IQ
As you can see from the chart above, Raffles Medical’s growth in free cash flow per share has significantly outpaced that of its dividends over time (though it must be noted that Raffles Medical’s dividend has been growing as well). Its balance sheet has also remained strong throughout the past decade and has even strengthened, with the gap between its cash hoard and debt widening steadily.
When it comes to room for growth, the healthcare provider does have some interesting catalysts. It’s going to spend around S$430 million in total (inclusive of land costs) to develop two sites to expand its floor space for providing healthcare services. For instance, the first site is located beside its flagship Raffles Hospital; when the construction’s completed, the hospital’s gross floor area is set to grow from 28,605 square metres to 49,217 sqm. The other site’s located around Holland Village in Singapore and would become a medical-retail centre; the company has earmarked 9,000 sqm in the redeveloped property for a medical centre while the rest of the area would be used for banking facilities, food & beverage outlets, and general retail shops.
These developments might take a few years to complete, but at least the company’s paving the way for future growth.
2. ARA Asset Management Limited (SGX: D1R)
Source: S&P Capital IQ
It’s easy to see how ARA Asset Management, a manager of private real estate funds and publicly-listed real estate investment trusts, has demonstrated the same general trends in its financials as Raffles Medical Group did.
As for its future growth opportunities, investors would have to place some trust in John Lim, the company’s chief executive – Lim’s goal is for ARA to have S$40 billion in assets under management (AUM) by 2016. With ARA’s AUM clocking in at S$25.8 billion as of 30 June 2014, there’s still a significant gap for the company to close.
The company has made some moves to narrow that gap though. For instance, in the second quarter of 2014, ARA extended the geographical reach of its private real estate fund operations into Australia. In that period of time, the company had also acquired a South Korea-based real estate management company which manages two privately-held Korean Real Estate Investment Trusts – this is the first time ARA has managed South Korean assets and is an area which the company is “working towards expanding” as well.
Foolish Bottom Line
Raffles Medical and ARA have displayed strong historical financials and do seem to have room to grow.
That said, there are still other areas investors should look at when it comes to considering them as potential investing opportunities. For instance, what’s the track record of their management teams like when it comes to business execution- and integrity-related issues? Do management’s interests align with that of minority shareholders? What’s the likelihood of competitors derailing their growth plans? These are just some of the important questions investors should answer before a more definite conclusion can be reached on whether Raffles Medical and ARA would make for a good investment which can potentially deliver growing dividends.
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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 Raffles Medical Group.