We will share here the What, When and Who of Dividends
That Could Help You Add That "Little Bit Of Magic" To Your Portfolio.
Are you an expert at trading stocks, buying and selling shares with the magical dexterity of Lionel Messi blazing through the defence line of Real Madrid?
OR, maybe you're a new investor looking for some enchanting investment ideas to get a foothold on your finances?
Whatever your experience level, you might want to look at DIVIDENDS!
They might just be the magic dust needed to give your trading efforts a little bit more omph!
"My current purpose for investing? To have a sustainable source of passive income via dividends"
- Leigh (Dividend Magic)
What are Dividends?
Dividends are like allowances routinely rewarded to you in the form of cash or shares from a company’s net earnings.
- To receive a dividend, you must buy the company’s stock before the Ex-Dividend Date and hold until that date.
- There are 5 Types of Dividend: Cash, Stock, Property, Scrip, & Liquidated.
- Make sure to research the company before you invest.
- A high Dividend Yield is not always a good thing.
- The Payout Ratio can signal a company's financial strength
- The stock price will adjust downward after the Ex-Date.
- Companies distribute dividends once or twice a year with some issuing them every 3 months.
- There are 2 types of Strategies.
Skip straight to the Company Dividend Noticeboard!
Not all dividends come in the same form. Here they are in terms of popularity:
- Cash Dividend – The most basic and popular form of dividend. Money is deposited directly into the trading account of the shareholder.
- Stock Dividend – When a company issues additional shares less than 25% of the current share balance (1:100 for example). If the portion is above 25% it is a “Stock Split” (1:3).
- Property Dividend – Companies can sometimes issue non-monetary dividends such as assets or copies of a famous book.
- Scrip Dividend – Basically, an “I Owe You”. A company issues a promissory note to pay their dividends at a later date. These notes also amass interest, so the longer the wait the more you get!
- Liquidated Dividend – At the end of a company’s life, they will have to sell everything. After paying off their debts and other obligations, shareholders will receive whatever remains.
While you won't be tasting all of these potionblends, these are important facts that you should be aware of in your research.
Now that we've peaked your interest in becoming an apprentice of
Magic Dividends, here's a list of companies giving Dividends that you might want to look at.
psst... also don't forget as a shareholder you get to attend their AGMs too!
Ex-Date: It's the deadline to be eligible for Dividends. All shares bought on the Ex-Date no longer have the right to receive the declared dividends. In other words, you have to hop on the dividend brookstick before this date or else it will fly away without you.LET'S TRADE
**Entitlement details sourced from Bursa Malaysia.
Lark: to do something spontaneous and unplanned.
As you enter the magical world of dividend investing, there are a few quick tips and concepts to keep in mind when looking to conjure up some cash using dividends.
- A high Dividend Yield (DY) is not always a good thing – While a high DY can indicate high return for your investment it may also indicate that a stock price has decreased significantly since the dividend announcement.
- Dividend Yield = Dividend per Share (DPS) / Current Stock Price
- Keep an eye on the payout ratio – A ratio above 80% could indicate that the company allocates too much EPS to dividend payout and can limit future company growth. A lower ratio could indicate the company is looking to reinvest it’s earnings (eg develop new products) and potentially increase its dividend payout in the future.
- Payout Ratio = Dividend per Share (DPS) / Earnings per Share (EPS)
- Reinvest through DRPs – Dividend Reinvestment Plans (DRP) automatically uses your entitled dividend value to buy additional shares. The shares are usually offered at a price lower than the market price.
- A stock price will reflect the entitlement of dividends – After the ex-dividend date, the stock price should theoretically fall by the DPS amount. This is because the stocks traded on or after the ex-date no longer have the dividend entitlement attached to it, and therefore are worth less unless other sudden factors are at play.
Now... Let's talk Strategy. There are two main types, Dividend Capture and Dividend Growth.
Simply put, the Dividend Capture Strategy involves buying stocks shortly before their ex-dividend date and selling those stocks shortly after their ex-date.
This ensures that you “capture” the dividend payout. There are literally thousands of dividend-paying stocks in Malaysia each year.
So, if you keep track of the ex- dates using a handy-dandy calendar (like the one we provided above) you could theoretically capture a dividend entitlement every single trading day! Cha Ching!
However, there’s a caveat. As a stock price reflects the entitlement of dividends, theoretically, a stock price will decline by the DPS amount once the ex-date has passed.
For example, Company A announces a dividend of RM1 with an ex-date on Tuesday. The stock price on Monday is RM100. Once Tuesday rolls around, the dividend of RM1 is no longer attached to the stocks traded that day, so the stock price should theoretically decrease to RM99 since traders are no longer receiving that entitlement to RM1 per share. We say “theoretically” because there are also other factors that impact the stock price, so it may not necessarily decrease.
While the Dividend Capture Strategy is more for short-term in & out investments, the Dividend Growth Strategy is its long-term complement.
The idea is to build a portfolio of shares in companies with stable growth and a historical trend to announce dividends, and then hold these shares for long periods of time.
- Pick companies that increase their dividend payout each year at a rate at least equal to the national inflation rate.
- Check that these dividends are paid using actual profit, not debt.
These types of companies tend to be more established businesses with larger amounts of net revenue or assets. Financial institutions like Maybank or REIT companies like IGBREIT a good example. Additionally, since you’re investing for the long-term, you can be less influenced by short-term market fluctuations. The last thing you’d want to do is panic sell due to a short-term event and forget about the long-term haul.
While this strategy is safer and more stable, you may find a good portion of your funds being held up by these stocks, limiting your purchasing power for higher return (and higher risk) in short-term investments.
A lot of long-term investors in search of the coveted “passive income” use the Dividend Growth Strategy to achieve that goal. Our friend Dividend Magic (check him out!) is a prime example of such an investor.
A Final Note
Whether you’re a short-term investor looking for a little extra boost in your portfolio or you’re a long-term investor trying to create a steady stream of income, dividends can be a great way to up your investing game. And if you’re somewhere in between, you can always use a combination of these strategies!