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The Better Supermarket Dividend Share: Dairy Farm International Holdings Ltd or Sheng Siong Group Ltd?

Dairy Farm International Holdings Ltd (SGX: D01) and Sheng Siong Group Ltd (SG: OV8) are two players in Singapore’s supermarket space.

Since both Dairy Farm and Sheng Siong pay dividends, which would be a better buy for income investors? Let’s find out by comparing the dividend yields, historical growth rates in dividends, and dividend payout ratios of the two companies.

Dividend yield

Dairy Farm shares closed at US$9.15 each on Friday, giving it a trailing dividend yield of 2.3%. Meanwhile, Sheng Siong shares last exchanged hands at S$1.13 apiece on Friday, translating to a trailing dividend yield of 3.1%.

Looking at dividend yield alone, Sheng Siong appears to be the better dividend share.

Dividend growth rate

The dividend yield tells us what a company has paid in dividends over the last 12 months, but we should also be looking at how the dividends of the supermarket giants have grown over the past five years.

In 2013, Dairy Farm’s total dividend was US$0.23 per share. The dividend then fell to US$0.21 per share in 2017, which you can see in the following chart:

Source: Dairy Farm 2017 annual report

As for Sheng Siong, its dividend had climbed by 6.1% annually from S$0.026 per share in 2013 to S$0.033 per share in 2017. You can see the growth of the company’s dividend in the table below:
Source: Sheng Siong annual reports

In terms of their track record in paying a dividend, Sheng Siong has the upper hand over Dairy Farm.

Dividend payout ratio

Beyond the trailing dividend yield, we should also assess whether a company can pay the same dividend – or pay more – in the future. To do that, we can compare a company’s free cash flow to the amount in dividends that it has paid.

I prefer a company with a dividend payout ratio of less than 100%, because it leaves some room for the company to maintain its dividend even in the face of business slowdowns in the future.

In 2017, Dairy Farm’s free cash flow stood at US$392.0 million and it paid US$284.0 million in dividend for the year. This translates to a dividend/free cash flow payout ratio of 72%.

In comparison, Sheng Siong’s dividend of S$49.6 million in 2017 was 82% of its free cash flow of S$60.8 million for the year.

A Foolish takeaway

Generally, large companies could be better dividend shares than smaller peers as there may not be much growth left for the big company and thus, it can pay out most of its earnings and cash to shareholders as dividends.

Dairy Farm is seven times larger than Sheng Siong in terms of market capitalisation and is also part of the Straits Times Index (SGX: ^STI). But despite Dairy Farm’s larger size, Sheng Siong looks like the better dividend share due to its higher dividend yield and superior dividend track record.

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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 Dairy Farm International Holdings Ltd and Sheng Siong Group Ltd. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.