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Dividend stocks favoured amid volatile markets
WITH falling rates and rising volume of negative yielding bonds marred by escalating trade tensions and economic uncertainty, analysts are recommending that investors shift their funds to high dividend-yielding equities in less-volatile sectors.
The volume of negative-yielding bonds has surged to US$17 trillion this year, accounting for about 30 per cent of bonds issued by governments and companies worldwide that are trading at negative yields.
With yield scarcity on the rise, analysts say increased allocations to dividend stocks can help buffer portfolios in these times of market liquidity. This is especially so given that the market is expected to remain unpredictable in the final quarter of the year on the back of the United States-China trade war.
While negotiations between the US and China are ongoing, the two nations remain divided on issues, making a near-term trade deal unlikely. On top of that, recent developments in the oil industry also contribute to market volatility.
Oil has now eased off from the recent spike as Saudi Arabia said it has fully restored output following recent drone attacks on its facilities.
Such events have led equity markets to fluctuate widely in the past months with almost all key equity indices down in August 2019.
Reits (real estate investment trusts) emerged as a top stock pick among analysts amid the current economic landscape. "Singapore Reits have done exceptionally well this year," said OCBC head of investment research Carmen Lee.
Based on the FTSE Straits Times Reit Index, it is up close to 20 per cent this year.
"The outperformance is not surprising given the market expectation of lower rates and the consistent payout of the Singapore Reits. At this level, most Reits are trading at or close to our fair values," she added.
OCBC continues to favour Mapletree North Asia Commercial Trust and Netlink NBN Trust.
According to a Q4 2019 outlook report from the DBS chief investment office, Singapore Reits offer both yield and growth. It cited the online-to-offline retail strategy and increased demand for industrial, logistics and warehousing due to the growth in e-commerce and diversification of operations from China as reasons for favourable yield and potential hikes in the Reits sector.
Maybank Kim Eng head of research Neel Sinha shared similar sentiments. "As far as the Reits sector is concerned, falling interest rates combined with current debt headroom should provide ammunition for further mergers and acquisition activity which is a positive for growing income base," said Mr Sinha.
Some of Maybank KE's top picks include Mapletree Industrial Trust and Ascendas Reit, as well as SATS for non-trust counters.
He also said that sustainable dividend yield stocks should be a large component of a Singapore equities portfolio. Earlier market outlook reports by Maybank KE have consistently taken on a defensive stance in its stock picks. In its recent note, it recommended that investors overweight on financials citing DBS and UOB as top choices.
According to a Bloomberg consensus forecast, dividend yield for DBS and UOB is expected to fare better than historical averages with DBS up to 4.9 per cent from 4.7 per cent and UOB edging up to 4.8 per cent from 4.1 per cent.
Outside Reits, most of the high-yield stocks are technology-related and those with smaller market capitalisation, according to CGS-CIMB analyst Lim Siew Khee.
Some of these include Fu Yu, Valuetronics Holdings, Sunningdale Tech and UMS Holdings, where a Bloomberg consensus forecast see these stocks offering a dividend yield of greater than 6 per cent.
The non-tech company picks are Singtel, Propnex, CSE Global and Singapore Press Holdings, said Ms Lim.
Companies with fixed payout ratio would result in dividends to grow with earnings.
Hence, investors who are looking for stocks that guarantee steady earning streams can park their money with Reits, trusts and certain defensive companies, said OCBC's Ms Lee.
Such firms typically generate free cashflows and have a track record of dividend payments.
Analysts also say that investors can continue to seek refuge in dividend yields for at least the next couple of years.
Maybank KE's Mr Sinha is confident that dividends for Reits will at least maintain the same absolute level till next year given the increasing distribution per unit (DPU). He also added that large cap Reits have a long weighted average lease expiry (WALE) of four years, which ensures dividend yields are sustained in the upcoming years.
Dividend payouts for the 30 Straits Times Index component stocks are also expected to be better in 2020, with an estimated dividend yield of 4.4 per cent compared to 4.3 per cent this year, according to data compiled by Bloomberg.
On the prospect of sustained growth of high-yield stocks, Jarick Seet, head of Singapore small and mid-cap research at RHB Securities, pointed out that companies are starting to see the shift towards dividend stocks, and yield may become key to determining the valuation of a firm.
"Hence, across the board, especially if the company has a strong balance sheet and generates enough cash, they are more willing to pay out more dividends to shareholders," he noted.
Investors should fundamentally look out for companies that pay dividends consistently throughout the peaks and troughs of an economic cycle to serve as a "volatility dampener", according to the DBS Q4 2019 outlook report.
"Dividend-paying stocks are also believed to have more resilient earnings with steady businesses, good capital management policies, and that they embrace creating shareholder value. Strong price support from longer-term investors also dampens share price volatility," noted the report.