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Guide To Dividend Investing In Singapore

Dividend investing is particularly popular in Singapore because dividend incomes are usually tax-exempted.


There are different kinds of investment strategies that we can adopt as investors. In Singapore, one popular investment strategy would be dividend investing. Dividend investing is a method of investing in stocks to generate dividend income from these investments.

Dividend investing is somewhat similar to income investing, with the key difference being that dividend investing involves choosing stocks that can generate income for us. This could be for funding our (early) retirement, building a secondary source of passive income, or reinvesting back to our portfolio.

Read Also: Passive Income Investing: 10 Popular Ways To Generate Passive Income In Singapore And Whether It Is Worth Investing In Them?

Dividend Income in Singapore Stocks Are Tax Exempted

In Singapore, dividend investing is particularly popular because Singapore (like Hong Kong) does not impose any withholding tax on dividends. This means that investors, be it Singaporeans or non-Singaporeans, do not have to pay any taxes on dividends. This is unlike if we, as Singapore investors, were to invest in US stocks or ETFs where we will be charged a 30% withholding tax as a non-US tax resident.

Do note that Singapore practices a one-tier corporate tax system. This means that most companies would already be paying corporate income tax as an entity, and any dividends they declare for their shareholders are generally tax exempted. There are exceptions, and you can find out more from IRAS on what these scenarios are.

Similarly, if you invest in a REIT, there is no dividend tax either. You do not have to pay corporate income tax for REITs as long as it distributes at least 90% of the taxable income as dividends each year.

By now, you can probably understand why dividend investing is so popular among Singaporean investors. The irony is that it’s actually more efficient to collect dividend income than to work because your dividend income is not taxable, yet your employment income is.

Investing In Blue-Chip Companies & REITs For Dividend Income

Singapore blue-chip companies with strong and stable cash flow tend to be favoured by dividend investors. These companies usually have a business moat that helps to maintain their competitive advantages over others, allowing them to sustain long-term profits and payout stable dividends to their shareholders.

An example would be our local banks. Our three local banks – DBS, OCBC, UOB – pay out a dividend income between 2 to 4%, depending on how much their share prices are trading. They are able to do so because they are not only profitable companies but also in a strong cash flow position.

Read Also: Singapore Banks Report Card: Share Price And Dividend Yield Performance – DBS; UOB; OCBC

Singapore REITs is another popular investment if we want to enjoy dividend income. It’s common to see Singapore REITs with a dividend yield of about 5% or more.

Once again, this depends on the price that you invest in. The more popular a stock is, the higher the price it will be and consequently, the lower the dividend yield will be. The opposite holds true. A stock that is being shunned by investors will be trading at a lower price and thus, has a higher dividend yield.

Higher Yields Do Not Equate Into Better Investments

This brings us to another important point for dividend investing. A stock with higher dividend yields does not necessarily equate to a better investment option for dividend investors.

If a company share prices drop because investors are concerned about its future earnings, or its ability to sustain its dividend payout, then share prices will naturally decline as a result of its poor sentiment. However, if we were to calculate its past dividend payout based on its current (lower) price, then we will get a pseudo high dividend yield.

For example, in the case of SingTel, its dividend yield has always been one of the reasons why Singapore investors are attracted to invest in it.

Source: Singtel

Over the past 6 months, SingTel has been trading at between $2.30 to $2.50. If we calculate SingTel’s 2020 total dividend payout ($0.1225) based on an average price of $2.40, we would have got a dividend yield of 5.1%. This looks pretty impressive.

However, if we take a closer look at SingTel’s dividend history, we would have noticed that SingTel’s total dividend payout in 2020 declined by 30% compared to 2019. To add on, the interim dividend paid out in 2021 (5.1 cents) was also lower compared to previous years (6.8 cents).

So, while the yield of 5.1% may look decent, investors should also anticipate that the total dividend payout in 2021 will be lower. True enough, SingTel announced on 27 May 2021 that the total dividend payout for 2021 would be 7.5 cents. Based on the current price of $2.42, this gives SingTel a yield of only 3.1%. All of a sudden, the company looks less attractive as a dividend stock.

This is a good reminder for investors that investing in a company simply because of a high dividend yield can be dangerous. What is more important is to look at the quality of the company’s earnings, and whether the dividend payouts can be sustainable or even grow over time.

Dividend Investing Isn’t Necessarily Safer

With dividend investing, we are usually investing in the stocks of companies that are profitable. After all, it would not be possible for companies to continue paying dividends each year if they are not profitable in the first place. This gives rise to a misconception that dividend investing is a safe investment strategy. However, this is not exactly true.

Investors can (knowingly or unknowingly) invest in high dividend yield companies that may not be considered strong companies. An example would be Pacific Century Regional Development (SGX: P15). While it has a current yield of about 8%, the company is making losses. Even if a company gives a high yield – if it has a downward-trending share price – the gains made from our dividends will eventually be offset by the lower share price.

The takeaway here is that dividend investing is neither safer nor riskier compared to other investment strategies like value investing or growth investing. Rather, it’s the companies that we choose to invest in that will determine the level of risk we are taking on in our investment portfolio.

Reinvesting Your Dividends

Dividend income that we earn from our investments can be deployed in any manner we choose. If we are in a retirement phase, the dividend income can be used for our daily living expenses. For those who don’t need the income yet, the dividends can be reinvested in the stock market. We can invest it back in the same stock or other stocks we choose.

In fact, it’s probably a good idea to diversify our investment portfolio so that we select dividend stocks from various industries, sectors and geographical regions.

Financial Ratios For Dividend Investors

Here are a few key financial ratios that you should know as a dividend investor:

Dividend Payout Ratio: This refers to how much of the company’s profits are paid out as dividends to their shareholders. You can calculate it by taking the dividend per share (DPS) and dividing it by the earnings per share (EPS).

Free Cash Flow to Equity: Free cash flow is the amount of cash generated by a business that is available to be distributed as dividends to shareholders. It is calculated by following formula:

Cash from operation – Capex + net debt issued

Free Cash Flow to Equity reveals if the dividend paid out by the company comes from its free cash flow or other forms of financing. If the Free Cash Flow to Equity is lower than the dividend payment, it means the company is funding the dividend via debt or existing capital it has.

Read Also: Guide To Value Investing In Singapore

When it comes to dividend investing, we should not invest in a particular stock just because of its high dividend yield. We need to analyse deeper by looking at its historical performance and various financial ratios to make a more well-informed decision.

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