David Kuo is a renowned income investor and CEO of The Motley Fool Singapore, where he oversees the Singapore team. He is also the lead advisor of Stock Advisor Gold, an elite-tier investment service.
Recently, I picked David’s brain on what started him on his investing journey, his dividend investment style, and much more.
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Sudhan P (SP): Hi David. Thank you for agreeing to this interview. I’m sure our Singapore readers would love to know more about The Motley Fool Singapore’s very own funny man. First off, a very important question, what’s your favourite food?
David Kuo (DK): You are probably thinking I would say Chicken Rice, Satay, Mee Goreng or Laksa. But I prefer the subtle flavours of Bak Kut Teh. It reminds me of the time when that was all that labourers on the docks could afford to eat – a bowl of rice, pork ribs boiled in a light broth and pickled vegetables. Today, we might say they had the right idea about eating healthily.
SP: I certainly wasn’t expecting you to say Bak Kut Teh. So, what got you started on your investing journey?
DK: Investing has always been a part of my life. I used to hear my parents talk about the stock market from when I was just knee high to a grasshopper in Hong Kong. What they talked about didn’t always make complete sense to a young boy in short trousers. But the mere fact that you are hearing about dividends and stock prices from an early age helps to take away the mystery and fears about buying shares.
SP: We all know you are an income investor, but were you an income investor right from the get-go or did you transition into an income investor from another style of investing?
DK: I had no idea at the outset what kind of investor I was. I bought lots of different shares. Some did well. Some didn’t. But over time, it dawned on me that I was most comfortable with shares that paid dividends, especially those that paid rising dividends. I would look forward to receiving those dividend cheques that came in the post. It felt like Christmas every time that happened. Today, my portfolio delivers dividends every month of the year. So, every month feels like December. The upshot is that it is important to keep an open mind at the start and let your personality determine the kind of investor you will eventually become.
SP: What criteria do you look out for before investing in a dividend company?
DK: There is no one single determinant. But a high return on equity coupled with a reasonable payout ratio is often a good guide to strong income grower. Rising revenues, high margins and low debt levels can also be good indicators. But it is important to be flexible and not to be too rigid when applying the rules.
SP: What are some of your favourite dividend companies listed in Singapore and why?
DK: REITs, and in particular, CapitaLand Commercial Trust (SGX: C61U). But if you look at REITs, they break virtually all the rules of a good income stock. They have lots of debt and they have very high pay-out ratios, which means they don’t retain much for internal use. So, that is why we need to be flexible when applying rules to filter for stocks.
I like the three Jardine conglomerates. I own Jardine Matheson Holdings Limited (SGX: J36), Jardine Strategic Holdings Limited (SGX: J37), and Jardine Cycle & Carriage Ltd (SGX: C07). They are like mini asset managers that allocate resources to various parts of the business empire to generate returns for shareholders. The interlocking shareholding structure creates stability, which is ideal for income investors.
I like Dairy Farm International Holdings Ltd (SGX: D01), which is another Jardine company. Historically, it has had a very high return on equity, which has been driven by a modest net income margin, a very high asset turnover and clever use of debt.
SP: How about your top favourite dividend company listed on a stock exchange other than Singapore?
DK: I like consumer staples. In the UK, I like British American Tobacco. In Hong Kong, I like Vitasoy International and in Malaysia, I am partial to Nestle Malaysia and Carlsberg Malaysia. Can you see the common denominator with these four companies? They all make things that you put into your mouth.
SP: What are some of the investing mistakes you have made over the years and what are the lessons you learnt from them?
DK: Probably the biggest mistake was a company called GEC in the UK. When I first invested in GEC, it was a stable cash-generating conglomerate that spat out lots of cash. At the helm of GEC was Lord Weinstock who reportedly asked for a bank statement to be put onto his desk at the start of every day. But GEC was virtually ruined by his chosen successor, Lord Simpson, who not only renamed the company Marconi but also frittered away a £3 billion cash pile. So, beware of companies that change names.
SP: What advice would you give beginners who wish to start investing?
DK: Learn how to build a portfolio. Think of a portfolio as a pyramid with income shares at the base, growth shares in the middle and wild, fun shares at the top. When you buy a share, try to figure out where it will fit into the pyramid. Start building your pyramid and watch how it can grow over time.
SP: What is the one thing, in your opinion, people need to succeed in investing?
DK: Patience. It doesn’t matter what type of investor we are. If we are able to resist the urge to sell, we can all look like geniuses in the long term. It also means we must have the courage to buy when markets are down.
SP: Could you sum up your investing philosophy in 10 words or less?
DK: Buy today for income tomorrow.
SP: Any parting words for our avid readers of The Motley Fool Singapore?
DK: When in doubt, always ask. If you still don’t understand, ask again. There is no shame in admitting that you don’t understand something. And never invest in something that you don’t fully understand.
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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 owns shares in CapitaLand Commercial Trust. Motley Fool Singapore Director David Kuo owns shares in CapitaLand Commercial Trust, Jardine Matheson Holdings Limited, Jardine Strategic Holdings Limited, Jardine Cycle & Carriage Ltd, Dairy Farm International Holdings Ltd, British American Tobacco, Vitasoy International, Nestle Malaysia, and Carlsberg Malaysia. The Motley Fool Singapore has recommendations on CapitaLand Commercial Trust, Dairy Farm International Holdings Ltd, Nestle Malaysia, and Carlsberg Malaysia.