How you can build a robust portfolio of dividend stocks

Keeping an eye on your dividend stocks is an important part of the process of becoming a more enlightened investor

I STILL experience a flurry of excitement when I receive dividends in my bank account. You may argue that 15 years of experience as an investor may have scrubbed out the thrill for me, but you would be wrong.

It is a little like eating ice cream - a guilty pleasure of mine. Dividends, indeed, taste just as sweet. The process of building a robust portfolio of dividend stocks, though, is not as easy as it looks.

In my quest to build up my dividend stream, I have made numerous mistakes and encountered my fair share of challenges.

Investing does not just involve a "buy and forget" process. Keeping an eye on your dividend stocks is an important part of the process of becoming a more enlightened investor.

If you are trying to build up your own stream of passive income, my hope is that these lessons can offer some guidance on what to do, and what to avoid.

The high yield trap

A high dividend yield is attractive, but there is usually no free lunch. I have learnt the hard way that the key to growing your dividend stream is not to bank on high-yield stocks.

Most of the time, the yield is high to compensate for hidden risks that may surface at unexpected times to scuttle your investments.

Take the example of First Ship Lease Trust (FSLT), a specialised business trust listed in March 2007 to own and lease vessels on a bareboat charter basis.

I invested a chunk of my money into the trust back then as it was paying out a very attractive yield.

Back then, FSLT's business model was touted as having the lowest risk among the players in the industry as it was the operators (that is, its customers) that took on the bulk of the operational risks. The distribution for the fourth quarter of 2007 stood at 2.42 US cents, or around 3.34 Singapore cents. Annualising this distribution, the full-year dividend of S$0.14 meant that I would be receiving a dividend yield of around 11.6 per cent at a share price of S$1.20.

But we all know what happened next. The global financial crisis broke out in late 2008 and decimated the shipping industry. Ship values plunged to crisis levels and the trust could barely stay afloat, let alone pay a distribution.

FSLT's share price more than halved by October 2008 to just S$0.50, and the trust is trading at just S$0.081 today. I sold my shares in 2010 at a 32 per cent loss even after accounting for dividends received.

This valuable lesson taught me not to simply chase the headline yield without considering the risks related to a company's business model.

Declining payouts

Another error of mine was to own a dividend-paying company whose business could not withstand the onslaught of competition.

Kingsmen Creatives Ltd is a communication design and production group that provides retail interior fit-out services and fabricates structures for corporate events and theme parks. While the business boasts reputable clients such as DBS Group, Ralph Lauren, and The Walt Disney Co, the first signs of trouble came in 2015.

After paying out a full year dividend of S$0.04 a share a year from 2009 to 2014, the group dropped its dividend to S$0.03 in 2015, citing tough conditions in the high-end luxury retail segment that caused revenue for that division to plunge by 26 per cent year on year.

For fiscal year 2016, dividend was reduced again to S$0.025 in tandem with a 37.6 per cent year-on-year plunge in net profit.

By 2019, annual dividend had been slashed to just S$0.01 as the group saw a sharp 94 per cent year-on-year plunge in net profit. With the outbreak of the pandemic, Kingsmen proceeded to eliminate its dividends entirely.

In hindsight, the declining dividend payments since 2015 should have been a clear red flag that the business was facing headwinds. An investor who sold back then could have saved himself a lot of heartache.

The share price proceeded to plunge from S$1 in July 2015 to its current S$0.28.

This sad example shows that an investor should stay alert for changes in the business and not remain overly confident that it can continue to pay out steady dividends.

Resilience and stability

Rather than go for high-yield companies, a focus on resilience and stability should be a more important consideration. In that vein, well-managed real estate investment trusts (Reits) certainly have a place in portfolios. After my missteps with FSLT and Kingsmen, I proceeded to purchase units of Frasers Logistics and Commercial Trust and Keppel DC REIT in 2017.

The former had a reputable real estate giant, Frasers Property Limited, as a sponsor, while Keppel DC REIT's sponsor was a unit of Keppel Corporation Limited.

Suffice to say these two Reits have provided not just steadily increasing dividends, but peace of mind as well.

Yet another place to look for steady dividend payers are blue-chip businesses that can weather a downturn. My purchase of Singapore Exchange (SGX) units in 2018 was accompanied by a 4 per cent dividend yield.

Although the headline yield was not high, the group has steadily grown its business over the years and has also bumped up its quarterly dividend from S$0.075 to S$0.08 despite the pandemic.

So, in addition to a rising dividend yield, I have enjoyed capital appreciation as well.

Regular, consistent capital injections

But building up a robust dividend portfolio is not just about selecting good stocks. The key is to make regular capital injections into these same dividend-paying stocks. That way, you can slowly grow your dividend stream over time.

The magic of compounding occurs when you reinvest the dividends you receive back into the same companies, thus growing your stream of passive income. It is a process that will take years, so the best time to start investing is now.

Get smart: Free up your time

Wealth is not just measured by the dollars in your bank account. The additional income from dividend stocks also provides you with more freedom to pursue your own interests.

When I first graduated and entered the workforce, I spent around three days a week giving tuition to earn additional income.

The extra S$500-800 a month allowed me to boost my savings and supplemented my income as I worked my way slowly up the corporate ladder.

I started my investment journey in 2005 and by the time 2009 rolled along, I was receiving around S$6,000 a year in dividends, which worked out to be an average of S$500 a month.

Armed with this additional cash flow, I cut back on my tuition and freed up more time to spend with my loved ones.

You can do the same, too. After all, the most valuable resource in the world is not money but time.

As you grow your investment portfolio along with your dividend stream, the flow of passive income helps free up time to engage in other interests. And that, to me, is why a robust dividend investment portfolio is worth pursuing.

  • Disclaimer: Royston Yang owns shares of DBS Group, Keppel DC REIT and Frasers Logistics & Commercial Trust.
  • The writer is senior analyst of The Smart Investor (https://thesmartinvestor.com.sg/), a website that aims to help people to invest smartly by providing investor education, stock commentary, and market coverage.

BT is now on Telegram!

For daily updates on weekdays and specially selected content for the weekend. Subscribe to t.me/BizTimes