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Both StarHub Ltd and M1 Ltd Have Market-Beating Dividend Yields, But Which Is Safer For Your Portfolio?

StarHub Ltd (SGX: CC3) and M1 Ltd (SGX: B2F) are the second and third largest telco companies in Singapore respectively.

Both the telcos offer dividend yields that are high, as compared to the stock market average. They could, therefore, be very appealing to income-hungry investors. However, which of the two would be the safer bet? I will attempt to answer that by comparing the companies’ dividend yields, dividend payout ratios, and dividend historical growth rates.

Dividend yield

StarHub is selling at S$1.69 per share at the time of writing. The stock price gives a trailing dividend yield of 9.5%. On the other hand, M1’s stock price now is S$1.59, translating to a trailing dividend yield of 7.2%.

Based on the dividend yield alone, StarHub appears to be more attractive. However, the dividend yield by itself does not tell us if the dividends are safe. We have to also consider the dividend payout ratios of the telcos.

Dividend payout ratio

The dividend payout ratio allows us to assess whether the telcos can afford to pay the same dividend (or more) in the future. This ratio compares the free cash flow to the amount in dividend the telco pays out.

I prefer companies which keep their dividend payout ratio to be below 100% because it leaves some room for dividend increases in the future.

In 2017, StarHub’s free cash flow was S$221.3 million, and it paid out S$276.6 million in dividend. In 2016, its free cash flow stood at S$184.0 million. It paid out S$346 million in dividend for the year. In terms of free cash flow, it had paid out more than 100% of it as dividend in both the years.

In contrast, M1’s free cash flow per share was 11.5 cents in 2017. For the year, it paid out 11.4 cents in dividend per share. One year before that, it had 13.9 cents in free cash flow per share and dished out 12.9 cents in dividend per share. For both 2016 and 2017, M1 had paid out less than 100% of free cash flow as dividend.

In this regard, M1’s dividends are better covered.

Dividend growth rate

The dividend yield tells us what a telco has paid over the last twelve months, but we should also be looking at how the telcos’ dividends have grown (hopefully) over the past five years.

From 2013 to 2017, StarHub had reduced its ordinary dividends from 20 Singapore cents per share to 16 Singapore cents.

M1, too, had decreased its ordinary dividends from 13.9 Singapore cents per share in 2013 to 11.4 Singapore cents in 2017. In 2013, M1 doled out 7.1 Singapore cents in special dividend as well.

Even though both telcos had reduced their dividends over the past five years, StarHub’s dividends had fallen at an annualised rate of 5.4%, compared to M1’s fall of 4.8% (excluding the special dividend).

A Foolish takeaway

Both StarHub and M1 have market-beating dividend yields. However, the dividend yield is not the only metric to look at when it comes to investing. Investors should analyse a company’s dividend payout ratio and dividend growth rates as well.

From the analyses above, it looks like M1 is a safer income stock due to its more conservative dividend payout ratio. However, M1’s free cash flow could be impacted further (and by extension, dividends too) when the fourth telco, TPG Telecom, enters the market later this year. Investors who are interested in investing in M1 should consider the impact as well.

[Editor’s note: A comparison of Singapore Telecommunications Limited’s (SGX: Z74) and StarHub’s dividends can be found here, and another comparison of Singtel’s and M1’s dividends can be found here.]

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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.