By Neoh Soon Kean
PREAMBLE
In November 2023, I wrote an article on the importance of being mindful not to be scammed when making investments. In that article I had pointed out that for the average person, putting your spare money into the EPF may be one of the best investment decisions you can make. This way of investing requires very little input or effort on one’s part. However, investing in EPF can have some drawbacks. First, EPF is not a liquid form of investment which allows you to withdraw your money any time you want to. This is unlike investing in the stock market where you can sell out at any time you wish. Second, over the long term, if you work at it, I believe it is possible to obtain higher returns from buying high dividend yield (DY) stocks. (Note: Dividend Yield = Dividend Paid Per Year divided by Price of Share. Example: Dividend Per Year is RM0.10 and Share Price is RM2.00. DY = 5%). Even one or two percent higher return per year would make a big difference over a lifetime.
In view of these two drawbacks for EPF, many readers may like to put some of their spare money into investing in high DY stocks. However, in order to adopt this method of investment, one would have to make some effort and try to understand why one would invest in high DY stocks and how one would go about it. In today’s article, I shall first explain why it is important to buy stocks for their dividend. In a follow-up, I shall explain how you would go about selecting high DY stocks which will provide you with decent long-term return.
There is little doubt that there are investors or even investment experts who disagree with what I have written. Some experts may say that other approaches may provide even higher returns. Perhaps they are right but is it feasible for an average person to use a more sophisticated investment approach? In my humble opinion, the High DY Approach is relatively simple to apply and has a long proven track record. One reason I am “pushing” this approach is that the current generation of Malaysian (and Asian) investors can be thought of as being extremely fortunate. Why do I say so? I shall explain in the next section.
Before you start reading the main body of this article, I would like to point out that throughout this article, I shall mention various KLSE-listed companies in order to illustrate one or another investment principle. The fact that I name a KLSE stock is not to be taken that I am recommending this particular stock as a suitable investment. As stated earlier, you have to put effort into finding suitable stocks yourselves.
A HISTORICAL NOTE FIRST
I started investing in KLSE more than 40 years ago in the early Eighties. My book: “Stock Market Investment In Malaysia And Singapore” was first published in 1986. Those were very much the ‘go-go’ years of investment for this region. A lot of ordinary people participated in stock investment and the market was very active. Many people made a lot of money and many others lost a lot of money. My book was very much addressed to the common people who knew little about the principles of investment and many were, rather unfortunately, in the second category. For this reason, I strongly pushed the High DY approach for the average person so that they would avoid the pitfalls in buying the wrong shares.
However, this did not go down too well with many investors, investment experts and investment institutions. I was called an ‘idiot’ or worse for ignoring capital gains. In those days, ‘nobody’ cared about dividend; capital gains were thought of as the key to high investment return, or so it was believed. Unfortunately, this line of thinking led to speculation and irrational chasing of certain ‘stocks du jour’. This approach pretty much came to an end with the Asian Financial Crisis of 1997/98. It is worth pointing out that at the start of 1997, the KLSE CI stood at 1,200. After more than 27 years, the CI just managed to scale past 1,600 (or a compounded annual return of just 1%). Even worse, the CI reached its all-time high of nearly 1,900 in July 2015. Nearly nine years later, the index is still about 15% below its all-time high. Capital gains would have been very hard to come by in the last decade or even two decades. My experience is that had an average investor put his money in high DY stocks since the Asian Crisis; he would still have obtained a reasonable return.
Why do I say that investors who intend to start investing now are very fortunate. The short answer is that at present, KLSE (and indeed most Asian markets) provides a great opportunity to pick up good shares with very high dividend yield. When I first published my book, average DY was very low because public limited companies (PLCs) paid little attention to their dividend payout as the average investors did not care about dividends. For example, the average DY for the largest and best-known Malaysian PLC, Malayan Banking Bhd (Maybank for short) in 1986, was only 2.5%. Remember, at that time three-month FD was paying 6.25% of interest. There was perhaps a valid reason for ignoring the dividend. Today, 3-month FD provides a return of about 3.5% but Maybank is selling at a price which provides a DY of just under 6.0%. It is not just Maybank, many first-class blue chips are selling at prices which provide a DY of well above that of FD. Indeed, today’s investors are a very fortunate lot.
I have been pushing all my friends to buy shares with high DY for a number of years and many have adopted my idea. However, some still hold back because they are concerned about the possibility that the market prices of the shares may fall even if their DYs are high. This fear is real and valid as share prices do fall and sometimes badly. How can we overcome this drawback? I would like my readers to remember the most important principle of share investment. Share investment is for the long term and stock market cycles are usually of short duration. If you buy a share, think of it as a long-term FD and just ignore the short-term fluctuations in its price. In the meantime, you would be getting a fairly consistent return if you have chosen your shares wisely.
The Covid pandemic can be regarded as one of the worst economic catastrophes to have fallen on the world. Many private and public companies even went bankrupt. How did the high DY companies perform over this period in terms of prices and dividend? The short answer is that, today, four years after the pandemic hit, most of the high DY shares would have recovered fully in terms of both price and dividend. Let us go back to the example of Maybank again. At the end of 2019, Maybank’s price stood at RM8.64 and it paid RM0.57 of dividend for 2019. During the worst point of the pandemic, its price fell to RM6.96 but it still managed to pay a RM0.525 dividend in 2020. If you regard your investment in Maybank as an FD, you can happily disregard the fall in its price and continue to receive almost as high a dividend as before the pandemic. Today, Maybank is selling at a price of RM9.99 and it paid RM0.59 sen of dividend for 2023. Not only can you regard it as an FD with very stable return; it is one which even has capital gain.
Let us now consider what are the other important reasons for buying high DY shares.
(1) DIVIDEND IS A SURER THING It is an accepted fact that the earnings stream of a PLC is uncertain. The modern world is highly unpredictable and a company’s earnings are affected by many known and unknown factors. Consider the Ukraine Conflict; few CEOs had anticipated its occurrence and its adverse impact on a wide range of industries. If a person buys a share based on its earnings (that is, based on Price Earnings Ratio), its price can vary seriously due to the unexpected fluctuations of its earnings. Let us consider the recent earnings history of Perlis Plantation Berhad (or PPB for short). PPB is one of the largest and most esteemed PLCs of the country. Even then its earnings can be highly unpredictable. In 2022, its earnings per share (EPS) was RM1.54 but this fell to RM0.98 in 2023. Largely as a result of this, its price fell from peak 2022 price of RM18.72 to RM13.80 in 2023. But it actually paid a higher dividend per share (DPS) in 2023 compared with 2022 (42 sen versus 40 sen). Thus, if one can treat one’s investment in PPB as an FD, one would not be too over-wrought by the fall in its price.
Not only is the earnings stream of a PLC unpredictable due to external factors; modern accounting is so complex that it is very difficult for an average person to understand what goes into the computation of earnings. The earnings of a company can be adjusted for many reasons, especially the so-called ‘one-off’ events – for example, profit or loss from disposal of assets, adjustment to the ‘fair’ value of assets and write-down or write-up in the value of certain assets. These adjustments make the ‘real’ (or ‘normal’ or ‘core’) earnings of a company different from the announced earnings. Writing as a person who was a long-serving member of the Malaysian Accounting Standards Board, even I have difficulty in figuring out what is the true earnings of a company. Dividend is something real and you can lay your hand on it immediately.
(2) DIVIDEND PROVIDES A ‘FLOOR’ FOR SHARES EVEN DURING SEVERE BEAR MARKETS I know I have just said that one should look at a share investment as an FD. I am willing to admit that many investors would feel very sad if the prices of their shares fall sharply even if they have no intention of selling them. I am sure many readers have experienced the anguish of seeing their investment losing one third or one half of its value. But if a share pays a decent dividend, such loss would be much more limited. For example, let us say there is a share which provides an annual dividend of 10 sen and its price is currently RM1.50 (providing a DY of 6.75%). Suppose a severe bear market takes place and the price falls by half to RM0.75. If the dividend remains the same, the share would be giving an annual return of 13.3%. That level of return is ridiculous and surely would attract many new buyers to enter the market and boost its price back up again.
(3) DIVIDEND PROVIDES A LINK TO REALITY When the stock market (or even an individual share) becomes truly ‘hot’; many investors can be swept up in the general atmosphere of optimism and enthusiasm such that fundamentals may not mean much. Investors become ‘momentum traders’, buying a share solely because its share price has been rising fast. The expectation is that its price would continue to soar because it has gone up so much before. However, if a shares price were to soar very high, its DY becomes meaningless (if it pays a dividend that is) and eventually commonsense would prevail and its price would return to earth. For example, in 2022, the price of Malaysian Smelting Corporation (MSC) soared to RM5.46 on expectation that its future earnings would be very high due to the then high price of tin. In that year MSC only paid 7.0 sen of dividend. At its peak price, the DY would have fallen to 1.2%. That was a very poor return indeed even compared with the low 3-month FD return of 2.5% at the time. When the earnings failed to soar, the price of MSC came back down very quickly to RM1.28. I dare say if MSC was paying out a high dividend, its price would not collapse to the degree it did.
(4) HIGH & CONSISTENT DIVIDEND PAYMENT IS A TRUE MARK OF FINANCIAL STRENGTH AND MANAGEMENT QUALITY It goes without saying that investors should seek out companies with high financial strength and good management as their investment targets. Financially strong companies can withstand unexpected economic catastrophes because they have high reserves to sustain them through the disastrous years. Good management is critical because the economic and competitive environments are always changing; good management can cope with what changes the world may throw at it and adapt to the new environment. How does an average investor figure whether a company is financially strong and has good management? It is actually very difficult. The companies which talk big about themselves and are often in the news are not necessarily strong and well managed. Indeed, the opposite is often true: many good companies tend to stay fairly low-key. If a company is able to pay a consistently high dividend for some time, it has demonstrated its financial strength and its ability to adept. This makes the task of selecting a strong and well-managed company a relatively simple process. As the Chinese saying goes: “Only if the road is long, do you know the strength of the horse”. In our aforementioned examples of Maybank and PPB; we can understand why the market has high regards for these two companies. Both of them had been able to sustain high dividend payments even through difficult times.
I very much hope that the readers are at least partially convinced of the wisdom of buying a share for its dividend. Let me close this article with a short ditty which was passed to me when I first started to invest.
A cow for its milk,
Bees for their honey,
And shares, by golly,
For their dividend.
