What do geese and swans and dividend-paying stocks have in common? They are all assets that produce steady income (with some literary leeway). Aesop told of a goose that laid a golden egg every morning. Then its owner got greedy and killed it to get at the gold inside. He found none. A Buddhist parable tells of how the father of a poor family is reborn as a swan with golden feathers and allows the family to occasionally pluck a single feather for financial support. Then the mother grows greedy and plucks all the feathers. The feathers eventually grow back, but they are no longer golden. The stories illustrate the importance of securing a stable stream of income and safeguarding our income-producing assets from our own greed or shortsightedness.
Investors searching for steady income or yield are hard-pressed in the current low-growth, low-interest-rate global economy. Income from savings deposits and low-yielding bonds can hardly keep pace with inflation. In addition, we live in turbulent times. Last year was unusually eventful for the Stock Exchange of Thailand: street protests, QE exit jitters, a mid-year rally and a roller-coaster ride at the end of the year amid emerging-market fallout from plummeting oil prices and diminished global sentiment. How can investors enjoy high yields in a low-interest-rate world while managing nerve-racking volatility?
If you haven't found the right answer, maybe you're looking in the wrong places. After all, the Thai economy and the world as a whole are still growing. True, yields will continue to be hard to come by for a while. Think outside the box and instead adopt a flexible and opportunistic approach within fixed income and consider substitutes, such as dividend-paying stocks, as an alternative way to generate income. Cash dividends accounted for nearly a third of the SET's total return of 17% over the past decade and should not be overlooked.
What exactly is a dividend? A cash dividend is a sum of money paid regularly by a company to its shareholders out of its profits. As such, it is a strong signal of a firm's financial health. Regulations and transparency are all fine and dandy, but there's nothing as comforting as cold, hard cash. So how can you identify these shares? Look for consistently high-yielding dividend-paying shares. Or, alternatively, look for dividend growers (that is, companies that consistently increase their dividends). In addition to income generation, dividend stocks also hold the possibility of capital appreciation. Nevertheless, dividend-paying stocks are not growth stocks and will not show above-average appreciation. This is an unavoidable trade-off.
And be careful: a high dividend yield can be a sign of poor performance on a capital level (dividend yields tend to be high when prices are low) or signal a lack of dividend sustainability, especially if the payout ratio (dividends divided by cash flow) is too high and there is little reinvestment for future growth. So look for a strong track record of dividend performance.
How can you begin investing in dividend stocks? Here are some tips:
Invest in stocks that qualify for the SET High Dividend 30 index (SETHD). These include the 30 highest dividend-paying stocks that have passed the tests of size, liquidity (SET100 constituent), time (paid cash dividends every year for at least three years) and growth (reinvested 15% of earnings for the last three years). The dividend yield is currently 3.6%. Firms in mature industries with steady income, such as resources, financials and property, figure prominently. Many of these firms are multinationals, which is unsurprising, as their diversified income streams from overseas businesses have allowed them to generate consistent income and dividends. Of course, don't forget to diversify your own portfolio.
Invest in mutual funds that focus on dividend stocks. You can quickly get the benefits of diversification and professional fund management, but bear in mind that each fund's selection criteria differ and, as a result, selected stocks vary from fund to fund. More than likely, the selection will differ from SETHD, which focuses on large stocks.
Go global. There are currently 372 companies yielding 3.5% or more around the world in both emerging and advanced markets. Dividend growth in emerging markets, however, has been more robust than in advanced economies over the past decade.
Last but not least, you may have an unclaimed dividend check waiting for you, especially if you or your forebears have declined to have dividends transferred electronically. A staggering 450 million baht worth of unclaimed dividends has been accumulating since the founding of the SET in 1975, probably due to investors relocating or passing away. You can contact the Thailand Securities Depository by phone (02 229 2888) or set up an investor portal account (www.tsd.co.th) to find out.
The world's first billionaire, John D Rockefeller, liked to say: "Do you know the only thing that gives me pleasure? It's to see my dividends coming in." Evidently, he found his golden goose. Where's yours?
Kiatipong Ariyapruchya heads the Capital Markets Research Institute at the Stock Exchange of Thailand. He holds a PhD in Economics from Columbia University, New York.