Monday, October 27, 2014

Screening with the SGX Dividend Champions?

From my research, what I understand is that within a broad market over time, 30% of the stocks will increase in value, while 70% of the stocks will decrease. However, the gains of the 30% is larger and will offset the losses of the 70%, which is why the broad stock market tends to increase overtime due to this net gain.

My rationale for stock picking is to form broad screens that is able to at least narrow down my investment universe by weeding out companies with the tell-tale signs of poor performance. If I can remove the bottom 50% of stock performers, I might end up with 25% winners and 25% losers in my available universe. The odds would be in my favour to not only perform positively on an absolute basis, but to also beat the broad market. I would be diversified, but not "over-diversified". I would have cut out most of the bad apples and I would just diversify my bets with the more likely winners.

I believe that Value, Quality and Yield are the better factors that determine long-term outperformance.

Value means buying a company that is relatively cheaper to similar companies.
Quality means buying a company that is making profits and generating cash.
Yield means buying a company that returns profits to and creates value for shareholders.

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Jun Hao from The Asia Report compiled a fantastic list of SGX companies that have been consistently playing dividends over the past 5 years. Excluding financial companies, Chinese companies, REITs and Trusts, he has managed to generate a list of 153 companies listed on the SGX that has had this good dividend track record.

If you click on the link to his page, he has a direct link to his google doc where you can see and view the companies, as well as some other metrics, such as dividend yield, PE, PB, payout ratio and market cap. I shall let you go over to his site to access the google doc.

What he has done is created a list of companies that have had dividend yields over the past 5 years. Make no mistake, although dividend yield is positive, total return could be negative if there is no capital appreciation. If dividends are just being paid from the capital itself, then you are just lying to yourself. Left pocket, right pocket. This is one of the main reasons why I do not particularly like dividend yield - it is not comprehensive enough.

I think shareholder yield is a much better metric. However, it is also made up of dividend yield, which makes Jun Hao's list still a very good starting point to begin with. Dividend yield could be insignificant, but I also believe that companies that even pay a token amount of dividends are much more well-run than those with no dividend policy.

After running a few filters, you can greatly narrow down the research that you want to do on companies that you feel comfortable with. For example:

If you screen for companies with PB under 1.25, you already get just 97 companies. 
If you run another screen for companies with PE under 15, you've narrowed down to 65.
If you run another screen for companies with DE under 0.3, you've narrowed down to 51.
If you run another screen for companies with payout ratio under 1, you've narrowed down to 48.
If you run another screen for companies with yields over 3%, you've narrowed down to 26.
Etc, etc.

I'm not saying that you should just use these metrics that is provided on his list. But at least you already have a list of 153 companies out of 700+ stocks on the SGX that have been consistent with their dividends. With some extra work here and there, I'm sure you can do your own screening and form a nice watchlist. At that point, just monitor Value. If the stock that you've already done all your fundamental research on is now attractive on a price basis, why not pick it up?

That is what I am planning to do and this will be my homework for the next few weeks!

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