Lately, I’ve received a few questions from May, a member of DividendVault.com on dividend investing. They are rephrased as follow:
Should I buy a stock when it announces its dividends or should I buy based upon its past track record? I bought a few stocks where their dividend yields are more than 4% per year based on 2019 dividends. However, once they had announced their dividends for 2020, they had yielded me less than 4% per annum.
Would the stock price be higher after an announcement of its dividends?
Should I sell off stocks that I have bought previously that have yielded below 4% a year and invest it into other better dividend yielding stocks?
First, I’m not into telling anyone what they should do with their investments. As an educator, my job is to encourage all to be purposeful with their investments, adopt sound investment principles and take full ownership of their decisions on each investment made independently.
From above, I find May’s questions common among dividend investors and so, I like to address them in this article.
1. The Basis of Investing in a Dividend Stock
There are investors who buy stocks just before or when their next dividends are being announced. Also, there are investors who will buy stocks that would yield the highest dividends.
So, what is the problem?
Am I not a practising dividend investor?
Well, here is what I have in mind. Yes, I’m a dividend investor but I do not invest to get one-time dividend income. I invest so that I could receive dividends again and again for many years to come. My focus is long-term, not really on how the stock price will react after the stock announces its dividends.
My focus is on the stock’s business models, financial results, balance sheet, and its future growth plans. I want to assess a stock’s capability to pay out recurring and increasing dividends to me in the long run. I like to receive regular dividend income by just making one investment transaction.
The difference is: I prioritize the business first, then only its dividends and stock price. Thus, I’ll be less bothered on its most recent dividend announcements on a stock and its short-term impact to the stock price.
2. Lesser Dividends in 2020 than 2019
2020 was a tough year. Inevitably, there are businesses which had recorded less sales, profits, operating cash flows in 2020 and they translate to lower dividend payouts in the year. So, if I invest in a stock to have 4+% a year in dividend yield, which is based on its 2019 dividends, should I sell off my stock because it would pay me less dividends in 2020?
Let me share my own experience with you.
On 6 April 2020, I invested in DBS at S$ 18.31 a share.
It has been paying S$ 0.30 a share in quarterly dividends. Thus, if DBS maintains its quarterly dividends, I will collect S$ 1.20 a share in dividends and thus, it will translate to a cool 6.55% per annum.
What a steal!
Then, on 29 July 2020, the Monetary Authority of Singapore (MAS) had made a call to all local banks to cap their dividends in 2020 at 60% of the amount which they had paid in 2019. As a result, starting Q2 2020, I have received S$ 0.18 per share in quarterly dividends. Hence, if this continues, I’ll receive S$ 0.72 a share in annual dividends, translating into 3.93% in dividend yields per annum.
Oops … From expecting 6+% to now having slightly under 4% in dividend yield.
So, what should I do?
Should I sell off DBS or should I just keep DBS in my portfolio?
I ran through my check list and here was what I had at that point in time:
I invested in DBS, knowing that it had increased its shareholders’ earnings, from S$ 1.63 billion in 2010 to S$ 6.39 billion in 2019. However, its profits in Q1 2020 fell by 29% from Q1 2019 but hey, it still made a nice S$ 1+ billion in 3 months. So, I’m pretty cool with that.
In Q4 2019, DBS reported to have S$ 19.9 billion in cash and has paid out S$ 3.9 billion in dividends in 2019. So, DBS is still a cash-rich bank.
3. Other Key Metrics
In Q1 2020, DBS maintained a low non-performing loan (NPL) ratio of 1.6%, net stable funding ratio of 112% and liquidity coverage ratio of 133%. So, to me, I’m pretty cool with that as well as I know DBS is well-capitalised and has been very prudent in lending for many years.
Finally, I ask myself, ‘What is my purpose for investing in DBS in the first place?’
That nailed the coffin for me as I intend to keep it like a collectible and hence, is exactly what I did with my DBS in my portfolio.
Insights and Takeaways
Here is a list of lessons that I have learnt from this experience:
1. The highest yielding stocks don’t always turn out to be great investments.
2. Focus on the business fundamentals. Don’t put dividends or yields above it.
3. In times of uncertainties, focus intensely on the resilience of the stock.
4. Assess stocks based on their true ability to generate profits and cash flow.
5. Buy stocks that I like to keep forever, even if they drop in stock prices.
Hopefully, you have learnt from my experiences. If you will like to find out more about my art of building a stock portfolio, you may check out the free training: