I have just received these two emails today.

[Dear Ck,

I missed to enrol the last course due to work commitment.....please send me details of this one.  Thank you.  I am 68, still working,  boss of my own company...long term player, DIVIDEN player., only on foundamental counters.

Best regards

Mr X]

[KC,

I leave the investing part to you, protecting the capital is my main concerned.

Miss Y]

I admire Mr. X above. At his age of 68, he is still very keen in learning about the fundamentals of investing, even though he is busy in his business. In contrast, there are so many youngsters out there who have many years to invest and enjoy the power of compounding, but yet, few, very few of them care about their personal finance. Or even if they invest, they do it without any knowledge, but merely listening to rumours, hypes and fads, following sales pitches, and become suckers, and lambs to be slaughtered by the syndicates, insiders and manipulators in the stock market. It is a wild jungle out there!

Most investors are risk averse. They want good return but shun risk and try hard to avoid risks most of the time. They want to protect their capitals, and hence many are attracted to the sale pitch of “Capital Protected Funds”, (risky) bond funds, like what Miss Y above likes, which are actually poor investments which cap the upside potential of investors, with not much better downside protection than equity. Think about the structured products of the late 2000, CDS, CMS, CDS², etc., when investors lost most of their capitals.

Fundamental investing and investing for dividends is a much better alternative and inherently a low risk investing strategy suitable for most people. You can see Mr. X knows it well too.

Dr. Neoh Soon Kean, in his book “Stock Market Investment in Malaysia and Singapore” gave dividend as the only reason that drives the share price as shown in his statements as follow:

“THE VALUE OF A SHARE DEPENDS ON ITS FUTURE DIVIDENDS”

“THE VALUE OF A SHARE DEPENDS ON ITS FUTURE DIVIDENDS”

He said, share is just a form of investment. Except for special situations, the return that they can provide must bear some relationship to the alternative returns that investors can get, for example fixed deposit rate, return from rental in property investments, etc. The dividend yield (DY) investing in a share must bear some resemblance to the returns from alternative investments. 

What is the use of earnings, and profit growth?

Most stock market players, including institutional investors, fund managers focus too much on profit, and profit growth as an assessment of how good is a company, and the use of price-earnings ratio (PE) is the most common method in market valuation. Investment bankers and professional analysts also like to use these earnings to cloud your judgment. Unless earnings are higher than the cost of capitals and are converted to cash in the pocket of shareholders, it remains as a castle in the air.

What is the use of these doggy earnings and earnings forecasts?

http://klse.i3investor.com/blogs/kcchongnz/63417.jsp

Why is dividend important

“A stock dividend is something tangible-it is not earnings projection; it is something solid, in hand. A stock dividend is a true return on the investment. Everything else is hope and speculation.” Richard Russell

Dividend is a real thing. You get 40.2 sen per share dividend from investing in SAM. You pocket it, use it for consumptions, or reinvest in the same or other dividend shares and in return, get more dividends.

During the bear market, SAM share may go down to RM5.00, but you would not feel too scare as the dividend yield then is more than 8%. In other words, it can provide a “floor” for share price when bear stampedes, and you won’t get too worried and still be able to sleep well:

http://klse.i3investor.com/blogs/kcchongnz/81334.jsp

When the market is too hot, dividend yield keeps us in close touch with the real world. London Biscuits doesn’t give you any dividend now. You wouldn’t want to chase its share when it went up above RM1.00 with news that they would reduce their huge capital expenses finally, like what others do. You won’t buy XingQuan shares despite they have announced beautiful earnings, increased in earnings, and even good cash flows, and have heaps of cash in their balance sheet much higher than its share price, will you?

Last but not least, dividend yield prevents you from being side-tracked by events which have little or no real benefits to you as a shareholder, such as bonus issues, share splits, free warrants, property injections by major shareholders, merger and acquisition, high growth, and getting of big contracts which keep on losing money like before etc. like these ones:

http://klse.i3investor.com/blogs/kcchongnz/63777.jsp

What would have happened to your investment outcome if you have chased the bonus issues and shares split plus “free warrants” of Asia Media, Bonia, Fimma Holding etc., the numerous bonus issues of EAH, Instacom, etc. when these companies hardly pay any dividend. Speculators, no, they can't be classified as investors, lost not only their pants, their underwear also, chasing the share prices up when those corporate exercises were announced, and their share prices eventually fell sharply..

Why not capital gain?

But why haven’t I talk about capital gain? Isn’t capital gain also important as it is the second part of the total return equation?

Capital gain is of course important. But what logical reason you can give for the share price to go up? I know share price can go up when someone “fries” it. But do you think he does that to enrich you? Very few smart souls benefit from the "frying", and most, more than 90% I suspect, became suckers again and again, and lost their pants.

The share price will likely to go up because of the growth in dividend. The management must manage the company well so that the company can pay growing dividends. That is the role of management, not all the time thinking about how to jack up share price by carrying out exercises which do not increase shareholder value in the long-term, but merely benefit the insiders, syndicates, manipulators in the short-term.

The dividend of Apollo was 7.4 sen in 2008 when it was trading at about RM2.50. The dividend yield was 3.0%. Its dividend has increased to 30 sen now and at RM5.95 at the close today on 6^th September 2016, an even more attractive DY of 5.0% when the share price has risen by more than 100% in 7 years.

Apollo has not given any bonus issues, share split or “free” warrants, the number of shares remains at 80m, but they are able to pay 3.4 times dividends from 7.4 sen seven years ago to 30 sen now, without having to issue a single new share, hence diluting its EPS, nor borrow a single sen from the bank?

What does the research show?

Robert Shiller examined the predictability of annual S&P composite returns in 1986 and found that dividend yields explained a significant 16% of the variation of returns in the 1946-1983 period.

Fama &French (1988) reported that dividend yields explain 25% of the 2 to 4-year returns. In economics, unlike science, a R-square of 25% is a significant number.

In 1978, Krisna Ramasawamy and Robert Litzenberger established a significant correlation between dividend yield and subsequent stock returns.

More recently, James O’Shaughnessy has shown that in the period 1951 through 1994, the 50 highest-dividend-yielding large capitalized stocks had a return that was 1.7% higher than the market. 

Jeremy Siegel, in his book “Stocks for the Long Run”, has further confirmed the out-performance of high dividend stocks from his research using data from 1957 to 2012 with striking results. The highest dividend stocks returned a CAGR of 12.6%, compared to 10.1% of the S&P 500 index.

Does buying high dividend stocks always work?

Not really. Table 1 below shows that if you have purchased HBGlobal with a dividend yield of 6.9% on 30/5/2012, you would have lost a whopping 86% as on 1^st July 2016, while the broad market has gone up by about 10.4% during the same period. AEGB, the former high flier Master Skill Education Group suffered the same fate with 72% loss. Even a seemingly good stock, JCY was not spared with a loss of 54% over the last 4 years, when it was at its high price of RM1.50 and giving 15 sen dividend then.

Table 1: High dividend stocks in 2012

The caveats on high dividend stock

High dividend investing strategy can very well be a winning strategy if the company has a stable business with consistent and proven cash earnings power that can grow over time. It may not be good for the company if there is inadequate normalized earnings and free cash flows. It is especially so if there is no excess cash in its balance sheet, and instead with significant debts.

This dividend payment is hence unsustainable as the company has to borrow or issues new shares in order to pay dividend. Paying too much dividend also negatively affect growth as less money is spent on capital expenses for the future growth of the company. A company with low return on reinvested capital is also unlikely to sustain high dividend payment.

When embarking on a high dividend investing strategy, it is better if you carry out the following checks:

1. Dividend yields at least the same as the bank fixed interest rate, currently average about 3.5%.
2. Dividend pay-out ratio should be less than a cut-off, say 65-85% so that there is money left and the business can still grow with the reinvestment for potential increase in future dividend.
3. A business model that doesn’t require massive amounts of capital outlays relative to its earnings power.
4. Reasonable expected growth rate in earnings at least matches the overall economy, say >4%, also for the potential growth in dividends in the future.
5. Strong balance sheet for sustainability of dividend payment.
6. High return of equity and capitals > 12% such that the dividend payment is not only sustainable, but grows from internally generated funds.
7. Good free cash flows from where dividend is paid from internally generated funds
8. Shareholder-friendly management dedicated to treating shareholders as owners

My experience in dividend investing strategy

I have used this dividend investing strategy for some stocks since end of last year. While many stocks, good ones included, have dropped in prices for more than 20%, some even up to 30% since the beginning of the year, the portfolio of 5 stocks picked and written by me based on dividend investment strategy, and published in i3investor about nine months ago as shown in the link below has gained about 41% this year as on 5^th September 2016 as shown in the Appended link and summarized in Table 2 in the Appendix.

http://klse.i3investor.com/blogs/kcchongnz/92727.jsp

Conclusions

Investing in high dividend stocks can be a winning strategy but it is not full proof strategy. However, it is a viable and low risk strategy if you can separate the chaff from the wheat.

Companies seldom cut their dividend, if they can afford to, as they do not want to send a negative signal to investors when their earnings drop a little temporary.

In fact, valuation wise using discount dividend model (DDM) is more reliable for me as there is less uncertainties in estimating future cash flows as shown in the link below.

http://klse.i3investor.com/blogs/kcchongnz/83959.jsp

With steady earnings and cash flows, healthy balance sheet, using DDM to value what a stock is worth brings the art of valuation closer to science, and we can be more confident with the margin of safety.

For those who are keen to learn about how to select stocks to invest using this dividend yield investing strategy, and for those who wish to have some good dividend stocks to invest for long term, and stocks from other proven investment strategies, to build up your wealth, you may contact me for a small fee at

ckc15training2@gmail.com

A watch list of good dividend stocks meeting all the criteria above and have good potential of total gain over long-term will be given to you once you have signed up for the course. There will be another watch list based on another favorite and proven successful investment strategy for you to consider to invest. You will also learn from my detail analysis and comprehensive reports about why and how those stocks are chosen along the course.

For those who are curious of why I am doing this may refer to my last article as appended below.

http://klse.i3investor.com/blogs/kcchongnz/103718.jsp

K C Chong

Appendix

Table 2: Return of dividend stocks as on 6^th September 2016