kcchongnz blog
Investing for Regular Income kcchongnz
In the last article, my friend John was so disappointed with his investment in a high dividend stock, Berjaya Toto, which cost him RM120000, or a loss of 24%, in the last 5 years from 2010 to 2015.
http://klse.i3investor.com/blogs/kcchongnz/113823.jsp
John also heard that his friend, Mike, also lost heavily in another dividend stock, Amway, during the same period. As he was just about given up hope in investing for dividends, he read an article by a blogger, Casey, about this investing strategy in his article below.
http://klse.i3investor.com/blogs/kcchongnz/85015.jsp
The article above explains that the share price, and hence the dividend yield, DY, must bear some relationship to the alternative returns that investors such as fixed deposit rate, return from rental in property investments, etc. The higher the DY compared with others, the better the investment. It says dividend, unlike accounting profits, are real cash flows going to investors pockets as regular income. It shows the company is truly earning and has the real cash to distribute to shareholders. Dividend, and DY, provides a floor to its share price, and prevents investors 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.
The above article also shows various academic research proving the success of this dividend investing strategy in the US and other more matured markets in the world. It also shows the investing experience of the author which was highly satisfactory embarking on this dividend investing strategy in the past years. The author suggested using a check list of a few things to look out for when embarking on this strategy. These are the things mentioned in the check list:
- Dividend yields at least the same as the bank fixed interest rate, currently average about 3.5%.
- 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.
- A business model that doesn’t require massive amounts of capital outlays relative to its earnings power.
- Reasonable expected growth rate in earnings at least matches the overall economy, say >4%, also for the potential growth in dividends in the future.
- Strong balance sheet for sustainability of dividend payment.
- High return of equity and capitals > 12% such that the dividend payment is not only sustainable, but grows from internally generated funds.
- Good free cash flows from where dividend is paid from internally generated funds
- Shareholder-friendly management dedicated to treating shareholders as owners
John found the methodology and reasoning plausible, and highly logical. From then on, he continued to read the articles by Casey on the dividend investing strategy, especially in the second half of year 2015 as appended in the links below:
http://klse.i3investor.com/blogs/kcchongnz/83903.jsp
http://klse.i3investor.com/blogs/kcchongnz/83959.jsp
http://klse.i3investor.com/blogs/kcchongnz/85379.jsp
http://klse.i3investor.com/blogs/kcchongnz/85828.jsp
http://klse.i3investor.com/blogs/kcchongnz/90072.jsp
Eventually, following Casey’s writeup, John has built up a portfolio of 5 stocks as shown in Table 1 in the Appendix for investing through year 2016 and beyond.
One year return of portfolio of dividend stocks
After slightly more than one year of investing in the portfolio of dividend stocks, John just started to look at the portfolio and its return as shown in Table 1 in the Appendix.
As on the close of the market yesterday on 18th January 2017, his portfolio returned 42.6%, compared to the loss of the market of 1.9% during the same period, or an excess return, alpha, of 44.5%.
There are four winners and one loser, with the loser, or a success rate of 80%. ECS ICT lost a minimal amount of just 5.8%. The winners are all with double digit positive returns. Scientex returned a whopping 90%, Padini at 60.4% and Perstima, 58%.
The outcome fits the very principle of fundamental value investing;
Win more and lose less;
Tails we win big, heads we lose little.
John figures that if he can maintain this 42.6% return compounded for 20 years, the total value of his RM500k will turn into more than RM600m!
However, Casey poured some “cold water” over his head, and caution him to aim for 15%, as no one has done 44.5% CAGR before, and it is impossible. With a reasonable expectation of CAGR of 15%, his RM500k will turn into a very tidy sum of RM8.2m in twenty years. He was quite happy if he could obtain that return.
Conclusions
Investing in high dividend stocks can be a winning strategy as it has been proven by various academic research and the investing experience of many super investors in the world and at home. The experience of Casey as published in the public forum a few years ago also shows that it is a very viable investing strategy in Bursa in the long term as well as the short term. 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.
K C Chong
Appendix
Table 1: Return of dividend stocks as on 18th January 2017
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Discussions
7 people like this. Showing 37 of 37 comments
Pintaras was a very good selection indeed. Despite having a tough FY2016, the management was still committed to give out dividends, in fact it was higher than previous year somemore.
2017-01-19 15:53
http://klse.i3investor.com/blogs/kcchongnz/83903.jsp
This article of the cash flows of Scientex by KCChong is par excellence.
2017-01-19 19:29
Posted by king36 > Jan 19, 2017 02:21 PM | Report Abuse
KC - a good one again
You talked about -EV once can u give me the thread again?
Is this you are interested in?
http://klse.i3investor.com/blogs/kcchongnz/49016.jsp
2017-01-19 21:37
Posted by kai8994 > Jan 19, 2017 03:53 PM | Report Abuse
Pintaras was a very good selection indeed. Despite having a tough FY2016, the management was still committed to give out dividends, in fact it was higher than previous year somemore.
Exactly. Pintaras has had a lot of problems in 2016 in one big project and may have suffered losses. However, due to its strong balance sheet, and stable earnings and cash flows in the past,dividends were not cut, but increased.
2017-01-19 21:40
Posted by kcchongnz > Oct 22, 2013 06:42 AM | Report Abuse
Is a target price of RM1.50 realistic?
Posted by aunloke > Oct 21, 2013 08:49 PM | Report Abuse
No wonder you sing so high for pmcorp but let's be realistic if we assume 20% growth for pmcorp food business and after 10 years what would be the earning ? We should then roughly know or estimate its share price, mind you that for the last 10 years its food business was not impressive. However it does not mean that pmcorp has no value , at this price it can easily improve and I'm banging on that to make some money.
Lets take aunloke's assumptions and work out if the target price is achievable.
PMCorp made 8m last financial year. The net income will be about 50m in 10 years time with that 20% growth in NI assumption. with a total number of shares of 773m, EPS would be 6.4 sen.
Giving a PE ratio of 10, the fair price is 64 sen. If the market wants to give a PE of 20 because it is such a high growth company, then the fair price is RM1.28.
Don't forget PMCorp has a lot of excess cash in properties, cash and investments. If that can amount to 22 sen per share, then RM1.50 is achievable, isn't it?
------
buy pmcorp germ endorsed by kcchong.fair value rm1.28.
2017-01-19 23:52
http://klse.i3investor.com/blogs/kcchongnz/85828.jsp
Quoting KCChong "The present value of all future dividends using this method is shown to be RM2.47 per share, representing a margin of safety of 34% investing in Padini at today’s price of RM1.62 on 5th November 2015. For a company like Padini, a MOS of more than 30% is what I am looking for."
Padini faced a lot of competition and headwinds during that period. Its management was smart to manage the company well. It sacrificed profit margins to maintain and increase market share.
Its dividends were generous and sustain. Though its earnings dropped for a period, it maintained the same dividend through higher dividend payout ratio, paying almost 80% of its earnings as dividends. It was able to do so due to its huge cash and its strong FCF.
Assuming no change in its fundamentals (who knows the future?), in 2015, this company's dividend yield was around 7 to 8%. This DY was at the high end of its dividend yield range. This simple indicator pointed to Padini being undervalued at that price at that time.
2017-01-20 00:13
http://klse.i3investor.com/blogs/kcchongnz/90072.jsp
Not knowledgeable on this company. It is presently outside my circle of competence. No comments.
2017-01-20 00:23
TQ KC.
"A teacher's greatest reward is that his student excel in his future undertakings."
Thank you for your passion.
You may have some critics but the volumes of appreciation of your contribution have drowned them all.
Keep up with your good work.
Cheers!
2017-01-20 04:32
Search out for firms that can pay a good starting dividend and also with the potential to grow both their business and their ability to pay good growing dividends.
2017-01-20 07:02
l am a newbie here but why is there no overlapping at all in high dividend stock pick in the article 10 Top Dividend Stocks in Malaysia (25/12/2016) and the selections here?
2017-01-20 07:31
Posted by limyok123 > Jan 20, 2017 07:31 AM | Report Abuse
l am a newbie here but why is there no overlapping at all in high dividend stock pick in the article 10 Top Dividend Stocks in Malaysia (25/12/2016) and the selections here?
The question should be, why should there be?
If everybody follows somebody,the result of doing the same thing is average at best. How could somebody's return be above average?
2017-01-20 08:58
just need to differentiate why is the dividend yield high? is it because of good cashflows and company generous or because share price has fallen so much because of poor outlook?
2017-01-20 10:20
The case studies of DDM model in Pintaras Jaya, Padini and Perstima and DCF model of Scientex by KC Chong are classic examples of KC's methods in imparting knowledge to newbies and even seasoned investors. Such simple explanation cannot be found in investment textbooks. They are, as 3iii mentioned, Par excellence articles.
Excellent analysis must be put into practice by investing into them which I did. Handsome gains in all. For Padini and Scientex, buy 1, free 1!
I am having these case studies archived for posterity, for my children and grand children's future reference.
2017-01-20 11:06
Primary aim for share investment is capital appreciation then follow by dividen collection.
If for latter - wrong concept
2017-01-20 13:25
Primary aim for share investment is buy UMWOG now.
Just like Warren Buffett buys into GM in 2008
2017-01-20 13:28
Kcchong picked flbhd. Anyone of you bought? I'm interested to follow buy, is it good entry now?
2017-01-20 13:38
Moral of the investment story is that you cannot invest on borrowed funds for long term. Who on earth buy shares on margin for 5 years?
2017-01-20 17:17
Banks charge you 6%
If you are good, 6% is sap sap sui.
smalltimer > Jan 20, 2017 05:17 PM | Report Abuse
Moral of the investment story is that you cannot invest on borrowed funds for long term. Who on earth buy shares on margin for 5 years?
2017-01-20 18:03
Aiyah...like w.buffet said if u follow PNB buy into UMWOG, u r speculating and not investing loh....!!
Don listen to mammy says loh....if PNB is so panlai like what mammy mentioned, how come UMWOG lose so much monies leh ?
This confirm PNB is just a so so average investors loh....!!
The deal propose is just a combination of 2 lame half past 6 oil & gas co, combining into 1 half past 6 bigger companies loh...!!
On top of that u need to dig into contribute more to the company that had no good track record & who had failed loh...!! U call that medical recovery fees loh....!!
Just becareful loh, remember this deal is just a speculation and not investment mah...!!
2017-01-20 18:06
no one has ever lost money following PNB restructurings....
only lousy raiders will lose money.
2017-01-20 18:27
no one has ever lost money following PNB restructurings....
only lousy raiders will lose money.
that is business sense and knowledge of Malaysian corporate history.
2017-01-20 18:28
analysts like to buy high sell low.
Super investors like to buy low sell high
The price is at historical lows and with direct backing from Malaysia's greatest most powerful shareholder.
2017-01-20 18:34
no one has ever lost money following PNB story.
USELESS, HOPELESS, STUPID & NAIVE AND NO BUSINESS SENSE MAMMY LOH..!!
TELL ME IF U FOLLOW PNB BUY INTO UMWOG DURING IPO AND HOLD UNTIL NOW, HOW MUCH HAVE U LOSS LEH ??
DON LET THIS TYPE, OF MALAY CENTRIC INSTITUITION CON YOUR MONEY AWAY LOH...!! THEY LOSE BIG MONIES...NOW NEED TO CON YOUR MONIES TO PATCH THE HOLE MAH....!!
RAIDER REALLY PITY THE POOR AUNTIES AND UNCLES LOH....!!
2017-01-20 18:38
analysts like to buy high sell low......you don;t think so meh? I find it true all the time.
I think raid also like to buy high sell low.
USELESS, HOPELESS, STUPID & NAIVE AND NO BUSINESS SENSE MAMMY LOH..!!
TELL ME IF U FOLLOW PNB BUY INTO UMWOG DURING IPO AND HOLD UNTIL NOW, HOW MUCH HAVE U LOSS LEH ??
DON LET THIS TYPE, OF MALAY CENTRIC INSTITUITION CON YOUR MONEY AWAY LOH...!! THEY LOSE BIG MONIES...NOW NEED TO CON YOUR MONIES TO PATCH THE HOLE MAH....!!
RAIDER REALLY PITY THE POOR AUNTIES AND UNCLES LOH....!
2017-01-20 19:04
Regular Income versus Capital Gain
An investment usually produces a combination of regular income and a capital gain.
Different types of investment produce different combinations of these two types of return to the investor.
Some investments produce only a regular income without any capital gains; for example, fixed deposits. While at the other extreme, some investments produce no regular income but promise the possibility of high capital gain; for example, investment in gold or diamonds.
An investment which relies on capital gains alone is a much more risky investment than one which provideds a regular income.
An investment which relies on capital gains alone to reward its investors is less attractive than one which provides the investors with regular income because the former is much less certain than the latter. Furthermore, it is only received right at the end of the period of investment.
An investment which relies on capital gains to reward its investor usually (but not always) produces much higher return than one which relies on regular income.
The above principles are similarly applicable to share investment and putting money in long term fixed deposits. Over the long run, the return on an investment of shares is very much higher than the return on fixed deposits.
Historically, in Malaysia/Singapore, the return on share investment had been about twice as high than that obtainable on fixed deposit (based on past ten years' record}.
2017-01-20 19:53
Posted by vcheekeong > Jan 20, 2017 01:25 PM | Report Abuse
Primary aim for share investment is capital appreciation then follow by dividen collection.
If for latter - wrong concept
I used to think like that when I was young and naive.
The "wrong concept" mentioned by you is probably because most retailers possess the mind set of speculation in the stock market, and believe in the greater fool theory, that,
"the price of an object is determined not by its intrinsic value, but rather by irrational beliefs and expectations of market participants. A price can be justified by a rational buyer under the belief that another party is willing to pay an even higher price."
If one is investing, in contrast with speculating, he should embrace this right concept as postulated by John Burr Williams in his Theory of Investment Value, that,
"the intrinsic value of a company was equal to the present value of its future dividends."
2017-01-21 10:58
YES DIVIDEND IS IMPORTANT....A BIRD IN HAND IS BETTER THAN 2 IN THE BUSH MAH.....!!
THUS DIV IMPORTANT MAH, BCOS IT IS A BIRD IN HAND LOH.....!!
2017-01-21 13:14
BREAKING NEWS!!!
Tin kosong Flying Chicken Head talk nonsense holland no 1 sifu Calvin rank 151...how many ppl participate in 2017 stock pick? Is 170 ppl mean he is bottom 20....haha...shame like no tomorrow
151) calvintaneng +3.0% http://klse.i3investor.com/servlets/pfs/71329.jsp
21% DUTALND 0.435 0.400 49800|20% BJCORP 0.355 0.340 58600|20% BPURI 0.440 0.435 45800|20% OPCOM 0.605 0.600 33200|19% PBA 1.150 1.150 17300
2017-01-21 16:16
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KC - a good one again
You talked about -EV once can u give me the thread again?
2017-01-19 14:21