5 Simple Steps to Pick Dividend Stocks
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As a Singaporean investor, I know the importance of building a diversified portfolio that can provide steady income and long-term growth. One strategy that has worked well for me is investing in high-quality dividend stocks. Dividend stocks not only give you a regular stream of payouts, but also the potential for capital appreciation over time.
However, not all dividend stocks are created equal. To find the true gems, there are 5 simple steps I follow when evaluating potential dividend investments. Let me walk you through them:
Step 1: Look for Consistent Dividend Payouts
The first thing I look for is a track record of consistent dividend payments. I want to see a company that has raised or maintained its dividend for at least the past 5-10 years. This shows me that the business has the financial stability and commitment to rewarding shareholders over the long haul.
It's a bit like my aunty who's been giving me ang pao every Chinese New Year since I was a kid - you can count on her to come through year after year! The same goes for a reliable dividend payer, like the real estate company CapitaLand Integrated Commercial Trust, which has increased its payout for over a decade.
Step 2: Ensure the Dividend Yield Exceeds the Risk-Free Rate
Next, I compare the stock's dividend yield to the risk-free rate, which in Singapore is typically the yield on 10-year government bonds. I want to see a dividend yield that is higher than the risk-free rate, as this provides a nice spread of income above what I could get from safer government securities.
For example, let's say the 10-year Singapore Government bond is yielding 2.5%. I'd look for dividend stocks yielding at least 3% or more. That extra 0.5% or more in yield is the "risk premium" I'm getting for taking on the added volatility of equities. Something like the REIT Keppel DC REIT, which currently yields around 4.8%, would fit the bill nicely.
Step 3: Look for Dividend Growth
Beyond the current yield, I also analyze a company's history of dividend growth. I want to see dividend payments that have increased steadily over time, as this signals a business with strong and growing cash flows.
Dividend growth is like a Singapore chilli crab - the initial taste is great, but what really keeps you coming back is how the flavors continue to evolve and improve with each new bite. A stock with a track record of raising its payout annually, such as the logistics company Wilmar International, is a sign of an underlying business that is getting stronger over time.
Step 4: Ensure Stable Free Cash Flow
To support those rising dividend payments, I need to see that a company is generating stable and growing free cash flow. Free cash flow is the cash a business has left over after paying all its operating expenses and capital expenditures.
This is like my local hawker stall - if they're constantly running out of cash to restock their ingredients and pay their workers, then they won't be able to keep serving up their amazing chicken rice for long. I want to invest in companies with the financial flexibility to keep rewarding shareholders, such as the conglomerate Jardine Matheson.
Step 5: Seek High Returns on Invested Capital (ROIC)
Finally, I look for companies that earn high returns on the capital they deploy. A high ROIC means the business is using shareholders' money very efficiently to generate profits. This is a sign of a strong competitive advantage and pricing power.
It's a bit like my favorite bak chor mee stall - they manage to churn out delicious bowls of noodles despite facing fierce competition from other hawkers. Their ability to consistently deliver great value is what keeps their customers (and me!) coming back. The Singapore banking trio of DBS, OCBC, and UOB all demonstrate high ROIC, making them attractive dividend plays.
Summary
By focusing on these 5 key criteria - consistent payouts, high yield, dividend growth, stable cash flows, and high ROIC - I've been able to build a portfolio of high-quality dividend stocks that have provided me with a nice income stream and solid long-term returns. It's a simple but effective approach that I encourage all Singaporean investors to consider. Happy dividend hunting!
Disclaimer: This article constitutes the author’s personal views and is for entertainment and educational purposes only. It is not to be construed as financial advice in any form. Please do your own research and seek advice from a qualified financial advisor. From time to time, I have positions in all or some of the mentioned stocks when publishing this article. This is a disclosure - not a recommendation to buy or sell stocks.