When you come across a dividend idea that is summarised in a single tweet, you know that it does not come much simpler than this.
Eddy Elfenbein, an investment writer and analyst, has been publishing his “buy list” on his Crossing Wall Street blog since 2006. What’s interesting is that his list of investments has beaten the US-based S&P 500 by observing a simple formula: buying outstanding companies and holding for long periods of time. Over the last 12 years, the total returns of his buy list was 230% versus the S&P 500’s comparable returns of 176%.
Dividends, dividends, dividends
In 2014, Elfenbein published a simple tweet on how to screen for dividend paying shares:
1. Screen for 3%+ divs. 2. Delete names with too much debt 3. Sit by pool.
— Eddy Elfenbein (@EddyElfenbein) July 15, 2014
In a single tweet, he conveyed two important characteristics of the companies he seeks:
a) A 3% yield suggests that a company is selling on the cheap
b) A company with negligible or little debt indicates that the company is well-run
Let’s put it to the test
At the moment, SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index (SGX: ^STI), is offering a distribution yield of 3.5%. To set a higher standard, let’s bump up the hurdle for the dividend yield to 4%. As for debt, I chose companies with net-debt position that was zero or less.
As it turns out, there were three blue chip companies, namely, ComfortDelGro Corporation Limited (SGX: C52), Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6) and Singapore Exchange Limited (SGX: S68) that made the cut.
Source: S&P Global Market Intelligence
The three companies above could not be more different. Yangzijiang Shipbuilding, as its name suggests, is in the business of shipbuilding in China. Singapore Exchange, or SGX for short, needs no introduction to investors who buy and sell stocks on its platform. ComfortDelGro is another familiar name, with its blue-coloured taxis plying Singapore’s roads.
Do we sit by the seaside now?
The screen presents a list of companies as a starting point for investors.
Avid Foolish investors might want to look at the industry that the companies are operating in, its dividend track record, its dividend payout ratio, and how much free cash flow these companies generate. Elfenbein’s point should not be lost, though. The dividend companies that we look for should reflect high-quality companies at a cheap price.
When we do find the coveted few companies that meet our criteria, then it may be time to sit back, relax, and wait for our dividends to roll in.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.The Motley Fool Singapore has recommended shares of Singapore Exchange. Motley Fool Singapore writer Chin Hui Leong owns shares of Singapore Exchange.