In a perfect world, investors will be able to get the best of both worlds: excellent growth prospects in a strong business as well as a steadily rising dividend yield. However, the reality is much starker, with investors having to juggle the delicate balance between growth versus yield. For myself, it’s usually a trade-off that makes sense – a business that intends to grow quickly needs to retain more cash for reinvestment, as compared to a business which has slowed down and becomes a cash cow.
By understanding this trade-off, I have learnt to moderate my expectations if I am seeking companies with a mixture of both growth and yield. A growing company usually only pays out a small dividend, while a high dividend yield company demonstrates a lower rate of growth. However, if an investor is able to hold a growing company over many years, he will be able to enjoy growth in earnings and cash flows (that will result in a higher share price) and also an increase in the dividends paid out (which adds to his passive income flow). That, to me, is an ideal mix of receiving both growth and income.
Here are two companies with excellent long-term prospects and that also pay out a decent level of dividends.
1. Singapore Exchange Limited
Singapore Exchange Limited (SGX: S68), or SGX, is Singapore’s sole stock exchange and operates a platform for the trading, purchase and sale of securities such as equities, fixed income and derivatives.
Though SGX’s securities daily average volume (SDAV) has been declining for the last few years, the group has more than made up for this trend by strengthening its derivatives division. This has powered SGX’s growth even as its securities division suffered from continued moribund trading volumes.
The group is actively launching new derivative products and forging collaborations and partnerships to fuel continued growth for the division. An example was the launch of the rubber industry’s first options contract on TSR 20 rubber, which offers market participants a new risk management tool. SGX has also, in the last few months, injected more capital into its bond trading subsidiary, welcomed a new derivatives trading member (DA Financial), and invested in a fintech company SmartKarma to boost its investment research platform.
All these growth initiatives should start to bear fruit in future years. In the meantime, SGX pays a quarterly dividend of 7.5 Singapore cents per share, and its shares have a trailing dividend yield of 3.7%.
2. Straco Corporation Limited
Straco Corporation Limited (SGX: S85) is an operator of tourism assets in both Singapore and China. The group owns two aquariums in China — Shanghai Ocean Aquarium (SOA) located in Shanghai, and Underwater World Xiamen (UWX) located in Xiamen. In addition, Straco also owns a 90% stake in the Singapore Flyer, as well as Lixing Cable Car and Chao Yuan Ge attractions in Xi’An, China.
Straco is embarking on a project to develop Chao Yuan Ge over the next two years, which should see contributions flowing in for the group in the future. As for the Singapore Flyer, a new Time Capsule attraction is being constructed and will open in the final quarter of 2019. Longer-term plans include a revamp of the Flyer to attract more tenants and increase the attraction’s footfall, though these have yet to be approved by the authorities.
In the meantime, Straco generates copious amounts of free cash flow, which should sustain its yearly dividend payment of 3.5 Singapore cents per share, for a historical dividend yield of 4.8%.
The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Singapore Exchange Limited and Straco Corporation Limited. Motley Fool Singapore contributor Royston Yang owns shares in Singapore Exchange Limited and Straco Corporation Limited.