At least 13 Singapore companies reported 5-year dividend growth of over 10%

FIVE companies – Civmec , Uni-Asia Group , Second Chance Properties , Jason Marine Group and SUTL Enterprise – have grown their dividends by more than 20 per cent over the past five years. Another eight have grown their dividends by at least 10 per cent, according to Bloomberg data.

If you’re an investor looking to build a Singapore Exchange (SGX) version of the S&P US Dividend Growers Index, however, some analysts say these may not be the names you want in your portfolio.

SGX is known for its dividend payers, and Singapore-focused indices tend to have a higher average yield. This is partly because of the market’s high number of real estate investment trusts (Reits), which must pay out 90 per cent of their income to avoid a tax on that income.

Strip out the Reits, however, and an analysis by The Business Times found that few companies have been able to grow their dividends over the past five years. After incorporating several other factors for a margin of safety, the number falls further.

A screen of profitable companies with growing earnings and gearing levels of under 50 per cent found only 32 that had managed to grow their dividends in that period.

Dividend growth is particularly important amid rising interest rates. With the risk-free rate at its highest in roughly 16 years, even companies with very high dividend payouts have begun to look relatively unattractive.

Yield-hungry investors may drop such companies in favour of safer investments with similar yields, or seek higher-yielding but riskier plays.

Saira Malik, chief investment officer at Nuveen, cautioned against focusing too much on current dividend yields.

Investors who adopt such a strategy, she said, may overlook “a wide universe of well-run companies with a history of growing dividends”.

Dividend growers tend to outperform over time. Malik noted that global dividend payers with a more modest yield of up to 3 per cent generally have better earnings growth potential, stronger profitability metrics and higher profit margins.

These help to mitigate risk when volatility prevails, she said.

“We believe dividend-paying stocks that exhibit both the ability and willingness to consistently grow the dividend are high-quality companies, given their ability to balance dividend payments with additional capital reinvestment for future growth initiatives.”

Generous dividend payouts may also harm a business in the longer term, she warned. 

Companies that are earning just enough to pay dividends, or are paying most of their earnings as dividends, have less capital to invest back into the business.

This limits future growth opportunities, and could threaten both share price appreciation and dividend growth.

“In addition, a company with a high dividend yield or, more importantly, a high payout ratio, may be more vulnerable to competitive pressure, as cash flow may be insufficient to support operations during volatile environments,” Malik said.

Pedro Choi, research analyst at S&P Global Market Intelligence, said stocks with high yields are also at risk of dividend cutbacks or suspensions.

Look long-term

So, should investors be loading their portfolios with names from the above list of dividend growers?

Only if those dividends are sustainable, analysts said.

Indeed, several of the companies on the list are already reporting financial weakness.

Uni-Asia, an investment company with property and shipping assets, posted a 74 per cent fall in net profit in the first half of the year. This was due primarily to a slowdown in the shipping market, which caused a decline in revenue.

Meanwhile, palm oil player First Resources saw its earnings fall 44.1 per cent in H1, on the back of a decline in sales and lower gross margins due to the drop in crude palm oil prices.

Several of the other counters with significant growth in dividend payouts saw their bottom lines inch up less than 1 per cent in H1. Among them are bus and train company SBS Transit , healthcare provider Raffles Medical Group and coffee shop operator Kimly .

S&P’s Choi noted that historical records are not necessarily “an indicator for future success”, particularly with the level of uncertainties that the global economy is currently facing.

“Investors should make assessments of a company’s future profitability and (whether its) cashflow… can support future dividend continuity,” he added.

Choi is more optimistic of the prospects of some of the larger and steadier dividend payers.

S&P estimates that the Singapore stocks it tracks will grow their dividends by 6 per cent in the current year. This is ahead of expectations for stocks it tracks in other developed Asia-Pacific economies.

Dividend growth will taper to between 3 per cent and 4 per cent next year, even as other developed Asia-Pacific markets are set to recover from their slower growth.

In Singapore, Choi said the banking sector has been one of the top dividend payers. DBS , OCBC and UOB are expected to pay out an aggregate of S$10.4 billion in dividends this year, up 26 per cent in nominal terms from 2022.

With interest rates forecast to peak, however, he expects the banking sector’s dividends to grow by a low- to mid-single digit figure in 2024.

One bank to watch is UOB, which is among the list of top dividend growers over a five-year period. According to Bloomberg data, it has grown its dividend by 6.2 per cent.