The Incredible Power of Dividends

Credit: Simon Cunningham

Dividends are a very important component of the stock market’s return. Research from Morgan Stanley showed that between 1930 and 2012, dividend income has made up more than 40% of the US stock market’s total returns.

This – the power of dividends – is something more Singaporean investors should be aware of. Back in November 2013, Chew Sutat, the Singapore Exchange’s head of sales, commented in a Business Times article that “Many investors in Singapore have a short-term trading mentality. They don’t think about dividends.” That’s a pity.

MICE (meetings, incentives, conventions, and exhibitions) player Kingsmen Creatives Ltd (SGX: 5MZ) is a great local showcase for what dividends can do.

Over the decade ended 27 April 2015, Kingsmen’s shares have gained a mighty 1,065% in price. That alone has handily trounced the 65% return achieved by Singapore’s market barometer, the Straits Times Index (SGX: ^STI). But when you factor in reinvested dividends, Kingsmen’s total returns vault to an even more stunning 1,857%.

With such an experience, it might make sense for a long-term investor to focus on Kingsmen’s dividends and think about reinvesting those pay-outs if there’s a chance.

How would Kingsmen’s dividends look like under the microscope? The firm has grown its annual dividend from 3.5 cents per share in 2010 to 4.0 cents in 2014.

Over that timeframe, Kingsmen’s balance sheet has been stellar (see chart below), carrying lots of cash with minimal debt – this gives the firm lots of buffer during tough times. Kingsmen’s annual dividends have also accounted for just 40% of its free cash flow on average – that low percentage figure can be taken to be a healthy sign for investors as it gives Kingsmen plenty of room for error and also points toward the potential for higher dividends in the future.

Kingsmen Creatives' dividends and balance sheet figures

Source: S&P Capital IQ

A Fool’s take

The verdict of history has been clear – dividends cannot be ignored. And, the simple act of reinvesting your dividends can make a huge difference to the returns you can enjoy from your investments. Keep these in mind the next time you see your dividend checks in the mail.

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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 Kingsmen Creatives.