What Is Dividend Investing, and How Does Dividend Investing Work?

Dividends are payments made to investors by companies, usually quarterly. Not all stocks pay dividends, so choose dividend stocks if you're interested in this income stream. Companies with a history of increasing dividends often show more stability than the overall market, and the consistent income can boost your overall returns.

Knowing how to buy the right dividend stocks in Singapore adds stability to your investment portfolio. These stocks are usually blue-chips that have become household names, including banks like DBS, OCBC, and UOB, along with companies like CapitaLand and ComfortDelGro.

Should you do the full monty and create a portfolio that consists solely of dividend-paying stocks, it, well, pays dividends. 

Firstly, there’s the security of investing in a host of profitable companies. Secondly, the payouts can be reinvested by purchasing even more shares in these companies. Finally, your dividends from Singapore-listed stocks aren’t subject to taxes for the most part.

» More: Best online brokerages in Singapore for dividend investing

Now that we’ve covered what dividend stocks are, let's move on to how the actual dividends are paid out on an annual or quarterly basis. 

Imagine owning 50 shares in a company with a S$5 annual dividend per share. You'd earn S$250 annually. Here's a breakdown of how dividend payments work:

1. Profits are earned by the company.

2. The company's board of directors distributes a portion of some of those profits as dividends.

3. The company publicly announces the dividend payment date, the amount per share, and the ex-dividend date. To receive a dividend, you must have purchased the stock at least two business days before the record date, which usually falls on the business day following the ex-dividend date.

4. The company then distributes the dividend to its shareholders.

The ex-dividend date is essential for investors. If you buy the stock on or after the ex-dividend date, you won't receive the upcoming dividend.

Dividends are typically paid in cash, but some companies also issue stock dividends.

Dividends are not guaranteed, but established companies are more likely to pay them, particularly in sectors like banking, utilities, REITs, and among blue-chip stocks. 

Dividends often signal a company's financial health, and investors generally expect them to be maintained; a potential cut can lower the share price. The most reliable dividend payers have a history of increasing dividends for decades. 

In Singapore, companies like Singtel, ST Engineering, and DBS are examples of established dividend payers. These institutions have long track records of consistent dividend growth and are often used as part of an overall dividend investing strategy. High-growth companies, such as those in the tech or biotech sectors, typically reinvest profits and rarely pay out dividends to investors.

Knowing how to evaluate and buy dividend stocks in Singapore involves researching several key metrics online. Here's what to look for in Singaporean companies:

Dividend per share (DPS) shows how much a company pays out in dividends for each share. Investors often favour companies with a history of increasing DPS, as this indicates a commitment to returning value to shareholders. Tracking DPS helps identify companies with consistent dividend growth.

Dividend yield helps you compare different dividend stocks and will be reported by financial websites or online brokers. The dividend yield is calculated by dividing the annual dividend per share by the current stock price. For example, a S$25 stock paying a S$1 annual dividend has a 4% yield, equivalent to a S$100 stock paying S$4 annually. 

Yield and stock price move opposite to each other. A higher dividend payment increases the yield. A lower stock price also increases the yield, even if the dividend stays the same. To illustrate, here are the two typical ways a dividend yield might increase:

• Company increasing dividend payments: Take for example a S$50 stock paying a S$2 annual dividend. If the company increases the dividend by 10%, the annual payout rises to S$2.20 per share. Assuming the stock price stays at S$50, the dividend yield increases from 4% (S$2/S$50) to 4.4% (S$2.20/S$50).

• Stock price falling: Alternatively, the stock price could decrease while the dividend remains the same. If that same S$50 stock with a S$2 dividend falls to S$45 per share, the yield increases to 4.44% (S$2/S$45), even though the dividend amount hasn't changed.

The dividend payout ratio shows how much of a company's earnings are paid out as dividends. A high payout ratio (especially over 100%) can be a red flag. It suggests the company might be struggling to cover its dividend payments, and the dividend could be at risk of being cut. A sustainable payout ratio indicates healthier finances and a more secure dividend.

There are a number of companies in Singapore with high dividend yields, but this should not be your only metric when considering what dividend stocks to buy. 

Beyond dividend yield and payout ratio, assess consistent profitability by reviewing earnings history, strong cash flow generation to cover dividends and obligations, manageable debt levels, a healthy and growing industry outlook, and the quality of the management team.

According to the Department of Statistics, households had an average monthly expenditure of S$1,628 per member in 2018. To completely defray this cost for the year, a portfolio size of approximately S$517,300 across several blue-chip stocks and real estate investment trusts (REITs) on the SGX is needed.

It might take a six-figure investment for you to achieve financial independence, but this doesn’t have to be done via a one-time lump sum deposit. Remember, it’s about how long you stay invested rather than being able to time the market.

While dividends are typically paid on common stock, companies have several options for distributing them to shareholders:

The most well-known and prevalent form of dividend, cash dividends are periodic cash payments made directly to a shareholder's brokerage account.

Instead of cash, companies can issue stock dividends, which are additional shares of stock distributed to existing shareholders.

DRIPs offer investors the opportunity to automatically reinvest their dividends back into the company's stock, often at a discounted price.

Special dividends are one-time dividend payments, often used by companies to distribute accumulated profits they don't currently need.

Preferred dividends are paid to preferred stockholders, who typically receive a fixed dividend payment before common stockholders are paid.

Dividend funds, including mutual funds and ETFs, provide a diversified way to invest in dividend-paying stocks, distributing dividends from their holdings to investors.

Dividends are generally taxable, but the specific tax treatment varies.

In Singapore, dividends from locally listed companies are typically tax-exempt. However, dividends from stocks listed on foreign exchanges, such as American exchanges, are usually subject to withholding tax. 
For US-listed stocks, this withholding tax is often 30%, significantly impacting the net return for Singaporean investors. This tax treatment can influence investment decisions, potentially limiting the appeal of certain multinational corporations (MNCs) listed on foreign exchanges.

Dividend stocks, like those from banks or REITs, offer regular income through dividend payments, making them attractive to income-seeking investors. 

Growth stocks, especially in sectors like technology or emerging markets, have higher growth potential. They typically reinvest profits to expand their business rather than paying dividends. This can lead to significant price appreciation over time. 

Prioritising dividends versus growth depends on several factors. Younger investors with longer time horizons often benefit more from growth stocks' capital appreciation potential, while those nearing retirement may prefer to invest in dividend stocks for stable income. 

If income generation is your primary goal, dividend stocks are a natural choice; for long-term wealth accumulation, growth stocks may be more appropriate. Finally, consider market conditions: while dividend payments can be cut during downturns (making diversification helpful), growth stocks can also be more volatile in such times.

Ultimately, a balanced portfolio that includes both dividend and growth stocks can be a wise approach, allowing you to benefit from both income generation and capital appreciation.

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Neither the author nor editor held positions in the aforementioned investments at the time of publication.

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