Income stocks are generally defined as companies that pay regular and increasing dividends. These stocks also typically offer dividend yields that are higher than that of the general stock market. In January this year, my Foolish colleague, Chong Ser Jing, ranked all the stocks in the Singapore stock market according to the Magic Formula, which was popularised by investor Joel Greenblatt. The purpose of ranking the shares was to unearth the 30 best stocks in Singapore for 2018 based on the formula. To apply Greenblatt’s strategy, we should buy the 30 stocks from the list and hold them for a year. However,…
Income stocks are generally defined as companies that pay regular and increasing dividends. These stocks also typically offer dividend yields that are higher than that of the general stock market.
In January this year, my Foolish colleague, Chong Ser Jing, ranked all the stocks in the Singapore stock market according to the Magic Formula, which was popularised by investor Joel Greenblatt. The purpose of ranking the shares was to unearth the 30 best stocks in Singapore for 2018 based on the formula.
To apply Greenblatt’s strategy, we should buy the 30 stocks from the list and hold them for a year. However, the income investors among us might be looking for higher-yielding stocks out of the 30 companies to add to our portfolio.
As such, with the help of our data provider, S&P Global Market Intelligence, I screened for the stocks that are selling at a trailing dividend yield that is higher than that of the SPDR STI ETF (SGX: ES3). The SPDR STI ETF can be taken as a proxy for Singapore’s stock market benchmark, the Straits Times Index (SGX: ^STI). As of Friday, 3 August 2018, the SPDR STI ETF had a dividend yield of 3.5%.
Of the 30 Magic Formula stocks in Ser Jing’s list, nine companies were selling at dividend yields of more than 4% each (as of 3 August 2018). Of those nine stocks, I picked out three companies which looked the most interesting to me.
Company 1: Valuetronics Holdings Limited (SGX: BN2)
Valuetronics is an integrated electronics manufacturing services provider that is headquartered in Hong Kong. The company offers a wide range of design, engineering, manufacturing, and supply chain support services for electronic and electro-mechanical products.
Valuetronics has a policy of paying out 30% to 50% of its earnings as dividends. It has also been paying an annual dividend from 2008 to 2018. The following chart shows the dividend trend of the company:Source: Valuetronics FY18 earnings presentation
Valuetronics is able to pay regular dividends due to the copious amounts of free cash flow that it generates. In 2013, it generated HK$41.3 million in free cash flow, which has since ballooned to HK$116.7 million in 2017. Together with the increase in its free cash flow, Valuetronics’ ordinary dividend has climbed from HK$0.08 per share in 2013 to HK$0.22 per share in 2017.
At its closing share price of S$0.63 last Friday, Valuetronics had a dividend yield of 5.7% excluding its special dividend. If the special dividend is included, the company’s yield would be upwards of 7%.
Company 2: Challenger Technologies Limited (SGX: 573)
Challenger Technologies is an operator of its namesake Challenger chain of IT-products retail stores. It also has an online tech marketplace called Hachi.tech. Currently, Challenger Technologies has a total of 37 stores comprising one flagship Challenger megastore store, 25 Challenger superstores, and 11 small format stores in Singapore.
The company recently announced its financial results for 2018’s second quarter. Revenue declined by 3% year-on-year to S$76.2 million, but net profit climbed by 3% to S$4 million.
The most impressive thing from Challenger Technologies’ latest set of results is its growth in free cash flow. For the second quarter of 2018, the company’s free cash flow was S$6.3 million, up from a negative free cash flow of S$0.2 million in the same quarter a year ago. As of 30 June 2018, Challenger Technologies also had more than S$60 million in cash and cash equivalents with no debt.
The retailer declared an interim dividend of S$0.011 per share for the reporting quarter. The dividend is less than 100% of the company’s free cash flow, and so, can be considered to be well-covered.
The higher free cash flow generated by the company, coupled with its low dividend payout ratio, should allow Challenger Technologies to pay consistent dividends in the years ahead. At the stock price of S$0.49 on Friday, Challenger had a dividend yield of 6.7%.
Company 3: Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6)
Yangzijiang is the largest China-based company in Singapore’s stock market. It is also a leading shipbuilder in China in terms of manufacturing capability and capacity.
Yangzijiang’s shares closed last Friday at a price of S$0.91 each, which gave the company a dividend yield of 4.9%. The company’s dividend yield is currently at one of its highest levels seen since 2013.
It looks to me that Yangzijiang’s high dividend yield is sustainable if the shipbuilder’s business improves in the years ahead. Even if the company does not grow its business, the low dividend payout ratio of 29% in 2017 should enable Yangzijiang to maintain its dividends comfortably.
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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 Sudhan P doesn’t own shares in any companies mentioned.