Tuesday, December 12, 2006

Dividend yield


For a list of dividend stocks (as of Jan 2009), see Free Cash Flow and Dividend Stocks.

Dividend yield is the stock dividend per share (DPS) divided by its share price. E.g. if Company A gives 10c dividend in 1 yr and its share price is $1, then its dividend yield is 10%.

Alas, as we can guess, it is very unlikely that a stock will be able to sustain a 10% dividend yield for long periods. The simple reason being that if it does payout 10% handsomely forever, why would the original owners list the company? They might as well keep it private and keep the 10%. There are times when the market collapse and dividend yield hits 10% but it is unlikely to remain cheap for long as the stock would rebound quickly. But if you do find one in the current market, let us know! So that we can all buy. Huat Ah!

Globally market dividend yield ranges from 2-4%, but some individual companies do give much higher yield (usually that also mean the company has not much growth prospect). In Singapore the average dividend yield is also around 3-4%, which is not much higher than fixed deposit rate, but actually quite ok by global standards.

Personally I think dividend is very important because it may be the only form of incremental income for a value investor (who prefers to buy and hold stocks). If a company does not pay dividend, there is no way to get cash out of your investment except by selling the shares. But if you would like to hold the shares because you think the company will continue to grow, what can you do? Value investors also need cash to buy groceries right? Not much use holding on to stock certificates until you are one leg into the coffin, isn't it?

Also, by paying dividend, the company shows that it has its shareholders in mind. Excess capital is always returned to shareholders if it cannot be put into better use. Of course, a growth co. needs ALL the money to invest and grow, and they don't pay dividend. Investors sometimes take that excuse, but usually also taken for a ride. However some growth company do grow big and when they are ready, they pay dividend as well, e.g. Microsoft.

However, Berkshire Hathaway has never paid dividend since Singapore got independent because its owner-manager, our hero Warren Buffett, thinks that he can use put the money into better use. And he has done that.

Since most if not all companies are not like Berkshire, we should expect them to return investors some of the money the firm has earned.

See also Company cheatsheet
and Earnings yield

12 comments:

Anonymous said...

Focusing on how much is being paid out does not provide a complete picture on dividend yield since dividend yield is DPS divided by share price.

If a company share price is 40 cents, EPS is 10 cents(i.e a PE of 4) and paid out 4 cents as dividend. It can't be sustain since the dividend yield is 10%? What about another company, share price at $1, EPS is 10 cents and paid out 4 cents as dividend. It is sustainable since the dividend yield is 4%?

8percentpa said...

Yes, the payout ratio is a very impt concept that should be discussed when we are talking about dividend yield. I left it out bcos I don't want the post to become a novel.

Well to answer your question, theoretical/in rare cases, it IS possible that a firm gives 10% dividend yield, as stated in your example.

In fact I think I know one real-life example: China Steel (Taiwanese steel co. not listed in SG though), 10% dividend yield, PER 8x or so. But not sure if they can sustain it say 5yrs down the road.

To give another analogy while a dividend yield of 10% is rare and impossible. Consider earnings yield which is the recipocral of PE. Now if we assume all the earnings are pay out as dividend. Dividend yield of 10% = earnings yield of 10% = PER of 10x.

Now how many stocks trade at PER 10x globally? Not so many. Now if we further consider that almost all co.s will not pay out 100% EPS as dividends, dividend yield of 10% becomes rarer. And further if we consider whether this 10% is sustainable, we reach near impossiblity. Hence my motherhood statement in the original post.

Berkshire said...

Whether a business should give dividend should be dependent on the timeless concept of, "if a bird in hand is worth two in the bush." Let's say if the business can generate or compound profits or earnings more in their hands than in my hands, I'll be more than happy that they retain whatever profit that they can utilize better compared to what I can do. In effect, if anyone is a better capital allocator or compounder than I am, I'll hand all my money to him or her and even if there ain't no dividend, I'm more than happy. It depends on the investor's goal in fact. For anyone whose only goal is to maximize the compounding effect, no theory is better than by comparing if a bird is worth more in your hand than in someone else hands.

Also, to add, Berkshire declared a dividend once, a very long time ago, probably in the early 70s. But Warren later remarked that he was probably in the toilet when it was declared.

sentosa said...

Are you looking at US Market? If yeah, probably that's why you can find high yield stocks.

Ban Leong Technology, have been paying dividend yield of 10% (gross) for the past 2 years.

Ascenda REIT -> Dividend 5.5%

Comfort -> Close to 5%

8percentpa said...

Would just like to reiterate that 10% yield is not impossible. There are stocks that can give 10% dividend yield, but they are either not sustainable or sooner or later, the market will realize that sooner or later and the stock price rally until the dividend yield gets lower again.

sentosa said...

Well, not all stocks are as straight forward as what you say. There is no rule of thumb that stock price will always rally until dividend yield gets lower. Check out during correction last year, the A-REIT price is $1.90 for 3 months. The yield would have been 6.3%,. But due to weak sentiment in the market.

Ban Leong Technology got one time drop until $0.19. With a prospect dividend of $0.02 every year it is more that 10% yield, but did you or any fund manager accumulate during that time?

Again, there are no fix rule in dividend yield. Some can continuously give 10% every year (Like Pacific Shipping Trust, First Ship Lease) due to the nature of the business. The price will not go up (Have you seen PST go up to 50 cents? never right?)

So there is a flaw in your statement. Market is not always rational.

8percentpa said...

Of course there are flaws in my statement. Otherwise, I won't be here blogging, I will be somewhere in Maldives, drinking cocktails and enjoying life. Hehe.

Well, for those stocks that you have mentioned, I don't really look at them so I will just comment off the cuff.

Although the yield hit 6% or 10%, and yet the stock did nothing. It can be a real opportunity to buy, which I hope you did. Bcos sooner or later, the market will realize this and correct itself. But the market is not rational in the short run, as you said. It can take 1yr or 2yr or even 5yr to see its mistake. But when it does, then you would have made your money, which I hope you will.

The other reason why the stock didn't rise is bcos the market may be expecting something else which is will cancel out the dividend yield effect. It the A-REIT case, the market may be expecting the end of this global bull rally which has lasted fr 2003 till now. Or A-REIT may be having some issues which you or I might not know.

And in the 2nd case, it is probable that Ban Leong is having some trouble in its business, they may cut dividend, or they may be having a bad quarter etc.

Investing is an art, there are no answers to many things. I tend to write a lot of motherhood statements bcos it's easier for the layman to understand. There are times when the market completely baffles me and sometimes, everyone else. That's the game and that's also the fun perhaps.

sentosa said...

Sounds fair enough =)
Yeah.. you are right on that "We might not be right all the time". Sometimes market just behaving out of control... =)

8percentpa said...

I was looking at these old posts and relooked into Ban Leong. The yield remained at 7% today, based on today's stock price of 14c.

At the time of discussion in Apr 2007, it was perhaps 20c or even 30c.

So what transpired was that the dividend collapsed from a high of 2.3c in 2007 to 1.5c in 2008 to a miserable 0.3c in 2009 and finaly this year it is 1c again.

If you had bought above 20c, today you will be about breaking even after considering the dividends.

As always, investing is an art and looking at just one factor is never enough. The yield at that time might say BUY, but other factors made it otherwise.

In the case of Ban Leong, perhaps its the nature of the business (tech distributor) which is very economic driven. Hence its dividend collapsed.

Maybe the verdict is not out for the stock.

Looking at its financials and dividend history, I can say the management tries its best to take care of shareholders.

We might see 30c someday.

Damien said...

Market is always wrong, its up to one to take advantage of its irrationality. If market value does not match its business value, its okay bacause if you do your homework and feel that its a good company, having a low price gives you chance to buy more at low price.

So in my perspective investing is simple but its human nature that makes it hard and market to be inefficient.

Dennis The Menance said...

The time to buy high yield bond funds was in 2008 and 2009 They were yielding over 20% yes over 20%because their was an assumption of a 1930's like depression on the horzion of course that did not happen and the price of high yield bonds skyrocketed.

8percentpa said...

Ban Leong today trades at 10c, the yield is 5% at 0.5c, a drop of 50% from 1c last year (2010).

Over the last 7 years Ban Leong paid out 8c in dividends. (the bulk before 2008).

It traded around 20c from 2005-08 but the stock crashed to 10-12c after 2009.

So unless you have paid 10c, the lowest price. It is unlikely that an investor in Ban Leong would have made decent return on this stock.