Christmas is over. We didn’t have chestnuts roasting on an open fire and we didn’t have Frosty the Snowman, either – it’s much too warm for that in Singapore. But Santa Claus did come to town. And in the case of, us, dividend investors, it could almost be Christmas every day. When it comes to income investing, it can sometimes feel like Christmas every month of the year. But the reliability of the income stream can depend on whether we have been naughty or nice, which in the case of dividend investors is whether we have been successful with our…
Christmas is over. We didn’t have chestnuts roasting on an open fire and we didn’t have Frosty the Snowman, either – it’s much too warm for that in Singapore.
But Santa Claus did come to town. And in the case of, us, dividend investors, it could almost be Christmas every day.
When it comes to income investing, it can sometimes feel like Christmas every month of the year. But the reliability of the income stream can depend on whether we have been naughty or nice, which in the case of dividend investors is whether we have been successful with our stock selections.
Since starting a column in The Business Times some 12 months ago, I have looked at a myriad of sectors. They range from pedestrian Real Estate Investment Trusts to high-flying airlines…
…. But they all have one thing in common. They have the potential to be good dividend payers, if we choose our stocks judiciously. So, how have some of those sectors done?
By and large they have performed well. Real Estate Investment Trusts, for instance, are often seen as reliable dividend payers. They could be the gift that keeps on giving because they must pay out at least 90% of their profits as distributions.
Amongst the best performers last year were CapitaLand Mall Trust (SGX: C38U) and Mapletree Commercial Trust (SGX: N2IU). The former had delivered a total return of 12%, of which almost half had been capital gains.
Banks had been steady dividend payers in 2018, though their shares have struggled to appreciate. But that’s alright. It just means that the dividend yield, which was already attractive, could be even more alluring.
That is how income investors should look at dividend shares. We should try to work out how much we are paying for every dollar of income. One example has been DBS Group (SGX: D05). Its shares have barely moved this year. But reinvested dividends have delivered a total return of 5%.
Many investors love airlines shares. But it is hard to understand why. Airlines are hampered by high operational gearing. In other words, they have high overheads that need to be recovered before they can deliver a bottom-line profit.
When conditions are favourable, they might. But when there are headwinds, their performance can be disappointing. Of the two dozen or so airlines that were reviewed, only three have delivered a positive total return last year.
Hotels could have high operational gearings too. But they might also benefit from an appreciating asset, namely, the land that their hotels sit on. Amongst the best performing hotels in 2018 were The Hong Kong and Shanghai Hotels (SEHK: 0045), which owns the iconic Peninsula in Hong Kong, and Singapore-listed Mandarin Oriental (SGX: M04).
Food & drink
Brewers have demonstrated some of their defensive qualities last year, though not in every instance. However, Carlsberg Brewery Malaysia (KLSE: 2836.KL) and Heineken Malaysia (KLSE: 3255), which are listed on the Kuala Lumpur Stock Exchange, have been notable standouts.
They have delivered total returns of 35% and 9.8% this year. In the year to date, Carlsberg Brewery Malaysia has increased its dividend 417%.
Food retailers have been resilient throughout most of 2018. Perhaps it has been extreme market volatility that has prompted some investors to seek solace in food. Perhaps it could also be because food retailers are considered defensive.
Whatever the reasons, Singapore grocers that include Sheng Siong (SGX: OV8) and Dairy Farm International (SGX: D01), which owns Cold Storage, have been amongst some of the best-performing shares in in 2018.
Sheng Siong has delivered a total return of 21%, while Dairy Farm International has rewarded shareholders with a 15% return.
2018 has been a turbulent year for investors. The Straits Times Index (SGX: ^STI) had lost a couple of hundred points or more over the 12 months. That can be painful.
But for income investors, the reliability of an income stream should always be more important than capital appreciation. It requires a special mindset to be an income investor. So, when stock markets are down, income investors simply see it as an opportunity to buy more dividends at a lower price.
Thing is, income investors think a little differently to others in the stock market. We know that from time to time, the value of our portfolios might fluctuate. Our shares might even drop below the price that we paid for them….
…. But provided the income stream continues to be strong, the market price of our shares should eventually take care of themselves.
Not everyone has the temperament to be a calm and considered income investor. But if you can, every day can feel like Christmas, especially when those dividend cheques hit your bank account.
But don’t forget to reinvest those dividends quickly. That is how you could grow your dividends effortlessly.
A version of this article first appeared in The Business Times.
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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 owns shares in CMT, MCT, DBS and Mandarin Oriental. The Motley Fool has recommended CMT, DBS, Sheng Siong, Carlsberg Malaysia and dairy Farm International.