Investing In A Stock For Its Dividend Yields

Mr said...

• Dear Mr Moolah,
  
  Sorry, but I don't know how to reach you and so, I am doing this here.
  
  Would like to seek your expert opinion on High Dividend Yield stocks to invest in Bursa.
  
  I am a 43 year old family man with a very busy full time job, and no time nor interest to monitor the stock market. A long time ago, a very successful and elderly friend of mine urged me to invest in a basket of High Dividend Yield stocks, and just collect its dividends over the years. Sadly, he passed on recently.
  
  I am now at the stage where I am struggling what to do with my funds. Savings accounts only pay 0.5% p.a. Fixed Deposits only pay 2% or 2.5% for 12 months. This is very, very small. How to survive on this?
  
  What do you think of PBBANK? A friend of mine swears by it. Can you recommend a few high dividend yield stocks for me to consider? And what prices would be a good price to enter? I plan to start with RM50k, and invest in 5 stocks with RM10k each. I can only monitor the stock market maybe once or twice a month. I do not know about trading, and plan to invest in these stocks for a very long time. My goal is to collect the dividends, hopefully, it will grow with time to beat inflation and fixed deposits. Things keep getting more expensive by each year due to inflation.
  
  I have also asked Mr Dali about this. So, please feel free to publish my query. I may check in again in a couple of weeks time.
  
  Would sincerely appreciate your thoughts. I know the final responsibility to invest is mine and mine alone.
  
  Thanks and kind regards,
  Mr Teoh

Mr. Teoh,

Do realise that I am not an investment advisor. Hence, whatever you read on this blog, do take it with some massive pinches of salt. Simple reasoning is that I could always be wrong.

However, this morning, I am willing to share some opinions or two on the issue of high dividend yield stock.

A dividend yield is a simple. It's basically the dividend paid divided by price of the stock you paid.

But strangely I find that many do not explain the risk involved in such an investment. This is not a risk free investment. The fact the dividend paid is never constant. As much as the dividends go increase, there is always a possibility that it could always shrink! And not forgetting the fact that any given stock can go up or DOWN at any given day. Meaning to say, there's no divine right stating that high dividend yield stocks cannot go down! It could go down as much as it can go up!

Let me use an REAL example on this stock called Uchi Tech. Why? Cos I had blogged on it couple of times before. So data to the stock is easily referred to.

Take 2007.

So what was UCHI's dividend history?

In 2006, it paid the following:

• Final Dividend - 6 sen
• Special Dividend - 1 sen
• Special Dividend - 3 sen
• Interim Dividend - 6 sen
• Interim Dividend - 3 sen
• Interim Dividend - 1 sen

If my data collection and counting is not wrong, that's 20 sen paid in dividends.

So this company pays good dividends. And how was the company? Was it making good money? Last year, on 26th Feb 2009, I wrote Would You Buy Uchi For Its Dividends? The company's earnings track record is tabled here

Now in 2007, the stock was trading between 3.42 and a low of 2.40.

Uchi usually announces its dividend payment dates for its yearly first batch of dividends in April.

Now I will make 2 assumptions. Firstly, a buyer for Uchi its dividends in 2007 will be in between Jan to April 2007. Lowest traded price of Uchi then was 2.98. I would use simply use 2.98 as a reference point. With a past dividend yield of 20 sen, at 2.98 one would be looking at a yield of 6.7%. The second assumption is a purchase price 2.40 based on the lowest price for 2007. That would be a yield of 8.3%.

In 2007, as per another posting , Reply To Would You Buy Uchi For Its Dividends? Uchi paid the following.

• Final Dividend - 6 sen
• Special Dividend - 2 sen
• Special Dividend - 9 sen
• Interim Dividend - 6 sen
• Special Dividend - 4 sen

Note: the buyer at 2.40 (lowest price was recorded in Nov 2007) would have missed the first 3 dividends.

21 sen total. More than what it paid in 2006!

In 2008, Uchi paid the following.

• Special Dividend - 4 sen
• Final Dividend - 6 sen
• Interim Dividend - 6 sen

Only 16 sen paid in 2008!!!!!

The dividends shrank!

In 2009, Uchi paid the following.

• Final Dividend - 6 sen
• Interim Dividend - 3 sen

The dividends shrank again!!!!

Let's add up for the dividends paid since 2007 for the buyers for a dividend yield at 2.98. Total dividends received since 2007 is 46 sen. Price of Uchi now is only 1.29!!! Which means this dividend yield investor is now sitting on a net current loss of 1.23 (2.98 - (0.46+1.29)) or an investment loss of 41.2%!!!

And for the buyer at 2.40. Total dividends received are 35 sen. Which means a current invest loss of 0.76 sen (2.40 - (0.35+1.29)) or an investment loss of 31.6%!!!

How?

See how investing for dividends can fail?

Is this a one off example?

How about this stock called Yi-Lai?

In 2007, I made the following posting, Review on Yi-Lai. Yi-Lai then on 11th Sept 2007 was 1.20. Yi-Lai today is 0.74!!

Of course, these are 2 examples where investing a stock for its dividends failed. My point? Simple. I am not saying such an investing would not work and I am pretty sure many could provide me with full data where investing a stock for its dividends are proven successful. However, all I am saying is the investor should be careful. There are many incidents where such an investing can fail! The sustainability of the company's earnings is just as important. The reasoning is simple, without sustained earnings for the company, how could the company afford to continue paying so much dividends?

Hope these second opinion helps and do note that I could always be wrong.