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Sweet Shares For Your Portfolio

Have you ever tried any of the dessert parlours that are sprinkled around the Bugis area?

The pudding joint that I chose had one of the longest queues, and probably one of the most complex ordering systems I have ever come across.

Spreadsheet dessert

With its intricate combination of alphabets and Arabic numerals, the laminated menu at the eatery looked more like an Excel spreadsheet than a selection of delectable desserts. Thank goodness for the pretty pictures.

But my perseverance paid off.

I soon figured out the “H”ashimas from the “P”astes and the “S”agos, which were numbered from S1 to S6. The “D”urian-based desserts were an inspiration.

Investing can be a lot like that too.

Faced with the choice of around 700 Singapore stocks – with their equally convoluted ticker system – where on earth do we start, if we want to build a portfolio?

Solid foundation

For most investors, a solid foundation of dividend-paying stocks could be a good place to begin. That doesn’t mean randomly picking half a dozen or so of the highest-yielding shares on the market.

Instead, we should look for a collection of businesses that have demonstrated a good track record of paying dividends through both the good times and the bad. The companies should also be able to pay dividends at a canter rather than at a stretch.

How much more sustainable, say, is the payout from Singtel (SGX: Z74) compared to StarHub (SGX: CC3)?

In other words, the companies’ payouts should be adequately covered by profits. Better still, they should be covered sufficiently by free cash flow. In times of increased market volatility, it can be comforting to know that your portfolio could continue to deliver a regular source of passive income.

Beyond income

There’s another thing.

The collection of businesses should, ideally, be unrelated to each other. So packing a portfolio with, say, just telecom companies is a not a good idea.

Consequently, try to choose as many different types of business as you can comfortably handle. With several hundred stocks to choose from, it shouldn’t be too difficult.

By and large, even a portfolio of supposedly boring income shares should grow adequately over time, especially if you have chosen companies that could increase their payouts. In theory, the share price of companies seeing fast payout growth could move higher too.

But if you are looking for extra growth, a few judiciously chosen companies that could grow faster than the market might help.

Story time

The key to growth investing is to understand the story behind the company. So you need to know how and why the company could grow. It is also important not to confuse the price with the story.

Do you, for instance, understand how Singapore Post (SGX: S08) or SATS (SGX: S58) expect to grow?

It is quite easy to get sucked into a great growth story. But as investors, we need to always keep our feet firmly planted.

A company’s growth potential is determined by the size of its end market and how many customers are prepared to buy its products and services.

So we need to have some understanding of how big the market is and how much further a company could expand into the available space.

A smattering of fast-growing companies could make a difference to the performance of your portfolio. But it is vital not to become so attached to your winners that complacency sets in and we forget to monitor the story.

Forrest Gump once said that “Life is like a box of chocolates. You never know what you’re gonna get.” The stock market can be like a box of confectionary too.

So it is important to do your homework, if you want to avoid the ones that could give your taste buds horrible shock.

A version of this article first appeared in Take Stock Singapore. Click here now for your FREE subscription to Take Stock – Singapore, The Motley Fool’s free investing newsletter.

Written by David Kuo, Take Stock - Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.

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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 Director David Kuo doesn’t own shares in any companies mentioned.