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Want Growing Dividends? Here’s Why These 2 Shares May Deliver

Investors in Singapore may be doing a great disservice to themselves. In November 2013, an executive from bourse operator Singapore Exchange was quoted in The Business Times as saying that “many investors in Singapore have a short-term trading mentality. They don’t think about dividends.”

That’s a real pity because dividends are an extremely important component of long-term stock market returns. This is aptly illustrated by what my colleague Morgan Housel once wrote:

  • Current S&P 500 price [as of March 2011]: 1,319
  • S&P 500 in real terms, based on 1871 prices: 74.35
  • S&P 500 in real terms with dividends reinvested: 38,531
  • The power of dividends: Priceless

But as much as it is important to pay attention to dividends, it’s also crucial for investors to be able to separate the wheat from the chaff when it comes to dividend-paying stocks.

How can that be done? This is where the payout ratio can help. There are two types of payout ratios: One measures a stock’s dividend as a percentage of its earnings (we can call this the earnings payout ratio); the other replaces the stock’s earnings with its free cash flow (let’s label this as the cash flow payout ratio).

Both ratios can give us an indication of how much room for error a stock has to maintain or grow its dividends in the future. Generally speaking, the lower the ratio, the more buffer there is to absorb untoward business developments.

With all these in mind, here are two shares which have the potential to deliver higher dividends in the future: Straco Corporation Ltd (SGX: S85) and Valuetronics Holdings Limited (SGX: BN2).

Payout ratios for Straco and Valuetronics (data as of each stock's last completed fiscal year)

Source: S&P Capital IQ

You can tell from the chart above that the two shares currently have payout ratios that are near or less than 50% and that’s a healthy range from the perspective of a dividend investor.

A Fool’s take

Payout ratios can be a good place to start when we’re evaluating investing opportunities. But, it must be stressed that there are still many other aspects of a stock – such as the strength of its balance sheet and the nature of its business (Some questions include are there customer/supplier-related concentration risks? Is the business highly cyclical?) – that must be considered before any investing decision can be reached.

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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 Straco Corporation.