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Dividend diamonds could power the STI

Nirgunan Tiruchelvam
Nirgunan Tiruchelvam8/5/2021 05:38 PM GMT+08  • 4 min read
Dividend diamonds could power the STI
The STI has one of the best dividend yields in the world.
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Singaporeans have been starved of travel. Before Covid-19, visits to the wonders of the world, such as the Eiffel Tower and the Taj Mahal, were common.

There is no need to venture far. The eighth wonder of the world is on this island.

It is not the Marina Bay Sands, nor the Singapore Flyer. It is the compounding power of dividends.

The Straits Times Index (STI) has one of the best dividend yields in the world. At an indicated dividend yield of 3%, the STI provides more than twice the yield of the S&P 500 (1.35%).

The returns from investing in the stock markets are driven by two factors — capital gain and the dividend yield. Most investors focus on capital gain, but dividend yield should not be ignored. Patiently reinvesting dividends can reap rewards that dwarf capital gains.

Dividend reinvestment is simple. When a company issues a dividend, the investor uses the cash to buy more of the stock. It can be automated with most brokerage accounts. The investor gets more shares of the company (or the index).

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The power of compounding can be illustrated by an investor who invested US$10,000 in the S&P 500 Index Fund in August 1971. This fund would have US$450,000 today, according to Bloomberg. The return would be purely the capital gain.

If the investor had reinvested the dividends in the S&P 500 Index Fund, it would be worth more than US$2 million ($2.6 million) today. This is more than four times the returns from the capital gain.

It shows that investing is not about timing. It is about time. The patient accumulator can outdo the chaser of capital gain.

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There is a performance measure that captures both capital gain and dividends. It is called Total return.

Singapore’s status as the one of the best yielding markets has been its saving grace. Companies in Singapore have low debt and minimal capital expenditure. Companies enjoy first world cost of capital in a third world region.

Dividends can keep returns afloat during bear markets. The stock market may drop, but the dividends can be consistent. As long as the company has the cashflow, they can meet their dividend obligations.

In April 2000, the dot com boom came to a grinding halt. The outperformers during the dot com boom were companies that hardly had earnings, let alone dividends. These included Yahoo, Microsoft, and Cisco. There were also companies like Pets.com that are now in the graveyard. These companies were burning cash rather than paying shareholders.

From the dot com collapse in May 2000 to January 2008, which was the height of the housing boom, the S&P 500 dropped 14% in terms of capital loss. On a total return basis (adjusting for reinvested dividends), the loss was 3%.

The STI, which had three times the dividend yield of S&P 500 in 2000, surged. In capital gain terms, it rose 59%. With the reinvested dividends, it gained 78%.

The implication is that dividends can be a saving grace in a bear market. The steady cash flow of stodgy companies on the STI such as Singapore Telecommunications, CapitalLand and Singapore Airlines, won the day.

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Some investors may prefer individual stocks for dividend growth rather than the STI. The REITs should be excluded, as they operate as trusts and not companies.

The table above contains Singapore’s dividend diamonds. These companies have steady cash flow from businesses that are hard to disrupt. For instance, Thai Beverage is a licensed liquor producer. The others are conglomerates.

They have low debt and a dividend payout ratiof less than 60%. This means that they have the leeway to raise dividends. The icing on the cake is that they yield in excess of STI yield of 3%.

Singaporeans may be frustrated by travel restrictions. However, they should enjoy the wonders of dividends at their doorstep.

Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer and author of Investing in the Covid Era. He does not hold any position in the stocks mentioned in this column

Photo: Bloomberg

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