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Many Singapore investors may be drawn to dividend investing as a way to build a passive income stream. Thankfully, our local exchange supports such a strategy due to its relatively high dividend yields.
For instance, Singapore’s Straits Times Index (STI) has a dividend yield of 4.3%, whereas other major benchmark indexes, such as Hong Kong’s Hang Seng Index (HSI) and the S&P 500 Index in the U.S. have a lower dividend yield of 3.9 and 1.9%, respectively.
| Indexes | Dividend Yield |
| Straits Times Index (STI) | 4.3% |
| Hang Seng Index (HSI) | 3.9% |
| S&P 500 Index (S&P 500) | 1.9% |
Source: FTSE Russell, Hang Seng Indexes, S&P Global
While the dividend yield of the STI is higher than that of other popular stock markets, it’s not just the biggest companies in Singapore that pay these generous dividends. The FTSE ST All-Share index, which tracks the top 98% (by market capitalisation) of stocks listed on the Singapore Exchange (SGX), pays a slightly higher dividend yield of over 4.5%.
However, we also have to understand that looking at dividend yields is only one part of the equation. Stock investors may also earn a return in the form of share price appreciation. Naturally, companies that grow faster will see their shares quickly increase in value. Such companies will also prioritise investing their cash flows back into their business for growth rather than paying out a dividend.
So, we need to understand the merits (and drawbacks) of investing in stocks for dividends.
#1 Consistent Dividend Paying Companies Tend To Operate More Stable Businesses
Companies that commit to a regular dividend payout to their investors need to be very confident in their operating cash flows. The longer-term visibility of their cash in and out flows allows such companies to pay regular dividends, either on a quarterly or bi-annual basis.
While some may think that dividend-paying stocks are “boring”, investing in businesses that are entrenched in their industry tends to provide some protection in a highly volatile market. We do not need long memories for this, as the COVID-19 pandemic ravaged the financial markets in 2020, and even more recently in 2022 due to the uncertainty over inflation and interest rate hikes.
Following this train of thought, we can see (in the chart below) that the Singapore market – encapsulated by the Straits Time Index – has declined 2.7% since the start of the year. In contrast, the S&P 500 Index has dropped 22.8%, while the Hang Seng Index (HSI) has plunged 29.1% so far.
Source: Yahoo Finance
This highlights the defensive nature of the Singapore market, compared to other major stock markets we tend to invest in.
But when the economy is booming, growth stocks, which usually do not pay dividends, may drive the U.S. and Hong Kong stock markets much higher than the returns derived from investing in the STI.
This also happened very recently – in the 1-year period after the initial COVID-19-led plunge in March 2020. We can see in the chart below that the U.S. and Hong Kong benchmark indexes soared far higher than the Singapore stock market.
Source: Yahoo Finance
#2 Build A Regular Stream Of Passive Income
For some groups of investors, receiving a steady stream of dividend income could be beneficial. For example, retiree investors who rely on dividends to supplement their retirement income. Even investors with a higher risk tolerance may look to dividend stocks to diversify their overall portfolio and returns.
In Singapore, our three local banks – DBS, OCBC and UOB – account for almost half the Straits Times Index.
Let’s use DBS in the next example. For a start, DBS issues quarterly dividends, which add more stability to investors who require the cash flow to supplement their daily living expenses or contribute to their regular investment plans.
DBS continued to pay dividends throughout downturn years, such as in 2008 and 2020. In fact, one of the reasons DBS lowered their 2020 dividend was because of a dividend cap on banks that was imposed by the Monetary Authority of Singapore (MAS). Their dividend payout level was reinstated immediately after MAS lifted the dividend cap.
Over the years, we can also observe that DBS has been increasing its dividends.
Source: DBS
Note that the dividend figures above include special dividends, as well as having to comply with MAS’ restrictions on paying dividends in 2020 – thus, they may look slightly skewed in certain years.
This also shows that dividend-paying companies can continue growing and increasing their dividend payouts over time.
For investors, this adds another layer of stability when we build our passive income portfolio. We know that dividend payouts can increase to help us fight against rising costs and inflation.
One other thing to consider is that Singapore investors do not have to pay income tax on our dividend income. This can stretch our passive income even further.
#3 Dividends Help To Cushion Against Big Drawdowns In Our Portfolio
Senior investors who intend to sell a portion of their portfolio to supplement their retirement income, may find themselves having to do this at very poor prices when markets are low.
This is also true for investors who may have planned to use their investments to pay for certain expenses.
This is where dividends can provide a buffer. Investors can meet some of their cash flow needs while they wait for a more opportune time to sell some of their stocks. For example, if we needed funds in the first quarter of 2020, selling stocks in that moment would have been terrible for our portfolio.
Taking DBS again as an example, its share price plunged as much as 32%. However, instead of selling our stocks, we would have some buffer through dividend payouts – which DBS continued to make in the first quarter of 2020.
Source: Screenshot from Syfe Trade
As we can see, today’s share prices of DBS have also recovered to surpass the previous highs.
At the same time, we will also be protecting the long-term health of our investment portfolio by not drawing down, especially at the worst possible times, which we may not have a choice if our portfolio does not pay any dividends.
Read Also: Investing With Syfe: 7 Things You Need To Know About This Singapore’s Robo-Advisor
How To Start Investing In Dividend Stocks
While there are clear benefits to dividend investing, it is never a sure bet. For a start, dividend payouts are not guaranteed. Dividends can also go up or down, as we have seen with DBS’ dividends – even though its business continued to be stable.
We also cannot ignore the other core tenets of investing. For a start, we should never be lulled into putting our entire investment into one stock or industry just because we want the highest possible dividends.
We still have to diversify our portfolio as well. We can spread our investments into many dividend-paying stocks or even into an index fund such as Singapore’s benchmark STI ETF.
To get started, we can lean on some of the features provided by our stock brokerage platforms, such as Syfe Trade. On Syfe Trade, which now gives us access to SGX-listed stocks, we can browse themes that we want to invest in, such as “High Dividend”, “Singapore Stalwart” or “Most Popular” stocks.
This will provide us with a list of stocks that have high dividend yields that we can put into our Watchlist – while we do more research on if we want to invest in them. Moreover, when we invest in SGX-listed stocks on Syfe Trade, we only have to pay a low brokerage commission of 0.06% (minimum $1.98).
Source: Screenshot from Syfe Trade
Source: Screenshot from Syfe Trade
We can also find out more about the individual companies – and how much dividends they are paying. In the screenshot below, we can see that Keppel Corp has a 12-month dividend yield of almost 5%.
We can even click on the “Analysis” tab to view analyst ratings of Keppel Corp. In this case, there are 6 analysts who all have “Buy” calls on Keppel Corp – with a target price ranging from $7.65 to $10.11, representing a potential upside of 15.4% to 52.5%.
Source: Screenshot from Syfe Trade
If we prefer, we can also invest in the STI itself. We can simply search for one of the two STI ETFs in Singapore.
Source: Screenshot from Syfe Trade
MAS-regulated Syfe Trade is a homegrown broker that gives us the benefit of accessing both the Singapore and U.S. markets in one place, at a low cost.
If you are not investing for dividends today, this can provide the springboard to consider diversifying some of your investments into dividend-paying counters. Investing in SGX-listed dividend stocks that you may be familiar with also gives you dividends in Singapore dollar.
If you are not sure where to start, you can use the Syfe Trade app. Besides the low 0.06% commission (min. $1.98) for SGX-listed stocks and US$0.99 commission for U.S. stocks (with 5 free trades a month), there are no other hidden platform fees, withdrawal fees or minimum balance fees.
From now to 30 October 2022, investors who are new to Syfe also enjoy a $50 welcome gift when we use the code “TRADESG” to buy any stocks of our choice. Simply deposit a minimum of S$1,000 in your Syfe Trade account to qualify.
Download the app to get started.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
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