How to build the dividend snowball

Let’s move on to the next strategy,

Build the optimal, income‑generating investment portfolio using the power of dividends

Bill Spetrino

Understanding the following terms:

  • Dividend : A sum of money paid regularly by a company to its shareholders out of its profits (or reserves).

The Power of Compounding

Many people invest in dividend-paying stocks to take advantage of the steady payments and the opportunity to reinvest the dividends to purchase additional shares of stock.

Dividend compounding occurs when dividends are reinvested to purchase additional shares of stock, resulting in greater dividends per additional stock that was bought.

Identifying a promising Dividend stock in SGX

First, visit the SGX stock screener and set the criterion to the following:

  • Dividend Yield = (Annualized Dividend per share)/ Price per share. It is set to 4% and above as a general rule to find stocks with higher dividend yields. (Feel free to adjust this amount)
  • Net Profit Margin is one of the most important indicators of a company’s financial health. It is a good indicator whether the company is able to sustain its dividends year-on-year.

Calculating for a promising Dividend stock

Calculate its 3 year average free cash flow and annualized dividend payout

Cash flow is the measure of cash into and out of a company’s bank accounts. Free cash flow, a subset of cash flow, is the amount of cash left over after the company has paid all its expenses and capital expenditures.

The rule of thumb:

In other words, the company should have available remaining cash on hand to sustain the dividends provided to shareholders. If not, one should question where are the dividend funds coming from.

Step 1: Calculating Free Cash Flow

Download the company’s Annual Report (ask google) into your computer and scroll to the financial statements (which is usually after the “Independent Auditor’s report” section.

Next, look for the Consolidated Statement of Cash Flows

Free Cash Flow = Net Cash Flow Generated from operating activities – Purchase of Property, Plant and Equipment

= 426,818,000 – 78,559,000 = 348,259,000

To find 3 year average FCF, find the previous year’s annual report to rinse and repeat the process.

In this case, 3 year average FCF = 353,899,000


Step 2: Calculating Annualized Dividend payout

Total Annual dividend per share x Total Shares Outstanding

Annualized Dividend Payout = 321,130,000

Thus, the three year average FCF (353,899,000) is more than the Annualized Dividend payout (321,130,000).

Next, check for consistent dividends year-on-year

Go to dividend historical data sites such as Dividends.sg

There should be either consistent or increasing dividend payouts year-on-year. Look for entities that have increased their dividend for five years or more. This greatly increases the odds of continued dividend growth, which is a big positive for investors.

Go for companies with lower Capital Expenditure (CAPEX)

A company with high CAPEX means that it has to continually reinvest its marginal profits in maintaining its business operations, leaving less cash flow to distribute as dividends.

For example, as one tech giant after another significantly hikes its capital spending on cloud data centers and the hardware going inside of them, this brings them up to be one of the largest CAPEX spenders in the market.

So look for a company that’s able to maintain/grow its business with minimal CAPEX. This means that it would require less cash to maintain its operations, therefore freeing up the capital to be distributed to investors.

Next,

Analyze the company’s industry and management

  • Is it a sunset industry ?
  • Is the management credible ?

It is not only all about numbers, learn how to qualitatively analyze a company HERE.

We hope that this will aid one in picking their first dividend stock and build that dividend snowball of yours.

Stay tuned! Till next time …

STAY UPDATED WITH OUR TELEGRAM GROUP

MAI GONG BO JIO

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