There will always be a group of people out there who take comfort in parking their money in “guaranteed” financial products such as savings accounts and fixed deposits offered by banks. However, the downside of this is that banks pay their depositors a pittance when it comes to returns, in exchange for the peace of mind and “security” which they provide for that guarantee. So, as an alternative, why not invest in dividend stocks?
Fixed deposit rates normally hover from 0.8% to 1.5% at most, and depositors have their money locked up for long periods of time. When sourcing for alternatives in the dividend stock space, I look for the same essential characteristics which most people would seek – safety, recognition, track record, reputation, and stability.
Though there is no such thing as a “guarantee” of the preservation of one’s principal in the stock market, there are certainly companies that provide a wide margin of safety, steady growth over the years as well as a very enticing dividend yield. Here are two companies which fulfill the above criteria and also boast dividend yields which completely trounce fixed deposit rates.
Stock 1: VICOM Limited
VICOM Limited (SGX: V01) is in the business of providing testing and inspection services and has two major divisions – vehicular inspection and non-vehicular inspection services. The group has a long track record of growing profits and dividends and has been generating excess free cash flow for the last few years, with cash accumulating on its balance sheet. VICOM has the lion’s share of the market (around 70+%) when it comes to vehicle testing and inspection, and is continually investing in new capabilities and competencies in order to keep up with the evolving market for motor vehicles.
The group has a balance sheet that is free of debt, and its practice has been to pay both an interim and a final (cum special) dividend every year. For 2018, VICOM paid out a total of 45.25 Singapore cents per share in dividends, and its historical dividend yield stood at 6.6% (if we include the special dividend). If just the ordinary dividends are accounted for, the total dividend is 36.63 Singapore cents and the dividend yield is still an impressive 5.3%.
Stock 2: DBS Group Holdings Ltd
DBS Group Holdings Ltd (SGX: D05) probably requires no further introduction. DBS is one of Singapore’s three big banks and offers a comprehensive suite of financial services for individuals as well as corporations. The bank has a stellar reputation for being able to grow its loan book, has a long track record of growth, and is progressive and open to growing its different revenue streams.
Investors in DBS can sleep well knowing that the bank is managed by a competent team of industry professionals, led by CEO Puyish Gupta. Even during crises, DBS has shown that it remains resilient and well-capitalised and is able to ride through tough economic times.
The bank has committed to paying a quarterly dividend of 30 Singapore cents per share. At DBS’s last traded price of S$25.92, the bank offers a dividend yield of 4.6%.
Investors need to ride out volatility
Though the two companies above have strong attributes and a long history of paying healthy dividends, investors need to brace themselves for short-term volatility when it comes to their stock prices. By focusing on what the underlying business is delivering in terms of cash flow and dividends, the investor learns to ignore short-term share price movements and to recognise that these two companies are able to provide strong and sustainable dividends.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore recommends shares of VICOM Limited and DBS Group Holdings Ltd. Motley Fool Singapore contributor Royston Yang owns shares in VICOM Limited.