Your phone pings. You pull down the notification bar, and an email announces that a big, fat cheque has just been deposited into your account – all without you having to work for it.
This sounds like the stuff of daydreams – or the setup of an online scam – but for many investors, getting regular payments like these is part of everyday life.
Interested in how some people gain recurring income from their investments? Here’s what you need to know about investing in dividend stocks.
What are dividend stocks?
Companies that earn a profit sometimes choose to distribute part of it to shareholders. This payment is called a dividend.
Typically, companies that pay out dividends do so on a predictable schedule (quarterly, yearly, etc.), although this doesn’t mean that it’s compulsory for them to pay dividends. Many companies don’t pay out dividends at all, preferring to reinvest their profits to grow the business instead.
How long do you have to hold a stock before you get dividends?
When it comes to receiving dividends, here are four important dates:
- Announcement date: This is the date on which a company’s board of directors announces the details of a dividend payment.
- Ex-dividend date: To be eligible for a dividend payout, you need to purchase your shares before (not on, or after) the ex-dividend date.
- Entitlement date: This is the date on which a company checks its records to see who should receive the dividend.
- Payment date: This is the date that you’ll receive your dividend.
If you purchase your shares before the ex-dividend date, you will be entitled to a dividend payout. As long as you hold the shares until the ex-dividend date has passed, you will receive the dividend even if you sell the shares before the payment date.
How to find dividend stocks
All stocks that pay dividends are dividend stocks, so that leaves you with hundreds of stocks to choose from in Malaysia. How do you whittle that list down to companies that won’t go bust anytime soon – companies that could give you consistent dividends for years to come?
Unfortunately, there’s no foolproof formula. Do a Google search for “how to pick a dividend stock”, and each personal finance article or self-proclaimed stock market guru will offer a slightly different formula to finding the best dividend stocks.
Generally, though, investors will look at these metrics:
1. Mid-cap or large-cap
Some dividend investors prefer investing in medium to large companies because they are more stable than smaller businesses. This could mean more reliable dividend payments over time.
2. Dividend yield
Get this ratio by dividing the company’s annual dividend by its stock price. The dividend yield shows you how much dividends you’ll get if you buy a certain amount of the company’s stock.
For example, if a stock has a 4% dividend yield and you have bought RM10,000 worth of shares, you’ll get RM400 in dividends.
3. Sustainable payout ratio
If a company is paying out too much of its profits to shareholders, it may not have enough capital to reinvest into the business, or to continue giving you large dividends in the long run.
Use the payout ratio to determine how much of a company’s income is being paid out as dividends. For example, a payout ratio of 20% means that the company paid out 20% of its net income as dividends in the past year.
Large companies tend to have higher payout ratios, as they can afford to share more of their income with shareholders. REITs tend to have high payout ratios too, because they have to share 90% of their income to avoid getting taxed. But if you notice a payout ratio of above 100% (yes, that does happen!), it could mean that a company’s large dividends won’t be sustainable in the future.
4. Consistent, growing dividends
Check if the company you’re interested has paid out consistent dividends over the past few years, and if the dividend per share (DPS) increases over time. Growing dividends help your investments keep up with inflation.
5. Consistent profits
A company that is continually raking in profit is more likely to be able to pay you consistent dividends that grow over time.
A higher yield is not always better
If you are investing for dividends, why not just pick the stocks that have the highest dividend yields? Isn’t a stock with a 10% dividend yield better than one that offers a measly 4%?
An unusually high dividend isn’t always a good sign. It could mean that investors are avoiding – or selling off – their shares because they think that the company will be (or is currently) facing financial difficulties. This causes share prices to drop significantly – and when share prices drop, dividend yield rates will go up.
5 Malaysian stocks that pay large dividends
Alright, here’s the section that you’ve been waiting for. We used a stock screener to filter out five stocks in Bursa Malaysia based on these metrics, and sorted them in order of the largest dividends paid out in the past year:
- Dividend yield: 3.5% and above
- Continuously profitable in the last ten years
- Reported a year-on-year net profit growth
Net income has grown from RM1.63 billion in 2014 to RM1.98 billion in 2018. Dividend investors may want to pay attention to this stock, as Carlsberg’s dividend payments have steadily increased over the past five years.
Heineken Malaysia Berhad, formerly Guinness Anchor Berhad, is engaged in the production and distribution of malt liquor brewing and cocktail products. Heineken also produces the non-alcoholic Malta drink.
Net income has grown from RM1.61 billion in 2014 to RM2 billion in 2018. Its dividend payments have steadily increased from 2014 to 2017, although they dipped last year.
Petronas Gas Berhad is a gas infrastructure and utilities company. Its business activities can be categorised into four segments: gas processing, gas transportation, utilities and regasification.
While total revenue has grown from RM4.3 billion in 2014 to RM5.5 billion in 2018, net income has been stagnant. Nevertheless, dividend payments have steadily increased in the past four years.
LPI Capital Bhd is engaged in investment holding operations, as well as providing general insurance through its subsidiary, Lonpac Insurance Bhd.
Total revenue has increased from RM1.2 billion in 2014 to RM1.5 billion in 2018. Net income, however, reached RM437 million in 2016 but dipped to RM313 million and RM314 million in 2017 and 2018 respectively. Its dividend payments have steadily increased from 2014 to 2017, although they fell to RM0.64 per share last year.
Net income has increased from RM6.7 billion in 2014 to RM8.1 billion in 2018. However, dividend payments have steadily decreased from 2014 to 2017, picking up only in 2018. Its share price has dropped around 13% in the past year, pushing its dividend yield to a relatively high 6.65%.
Should you invest in dividend stocks?
Dividend stocks can be a good source of income, but you’ll have to research potential investments carefully.
The stock market isn’t for everyone, however. If you don’t want to spend time poring over a company’s annual report, or if the thought of making transactions worth thousands of ringgit makes you break out in nervous sweat, consider other ways of investing your money. Instead of picking individual stocks, you could invest your money in unit trusts, ETFs or via robo advisors.
