Sunday, September 4, 2016

The Dividend Scorecard Portion - An Extension of Enhanced Triple S Scorecard - Part 1

The search for Dividend Stocks has been completed and the scorecard had been created.

To emphasize again, I am not talking about REITs or STI-linked Blue Chips, when I suggested about Dividend Stocks.

This is a search for the pennies or the ignored stocks (including the less famous and popular Blue Chips) that has the ability to give out at least 5% dividend yield in the following year.

In addition, rather than having an individual new scorecard, I have created it as an Add-On portion to the Enhanced Triple S Scorecard.

The following information will elaborate about the mindset behind the Dividend Scorecard Portion:

1. Reasons for the Removal of REITs and Stocks within the STI from my research.

In my view, REITs are quite straightforward. Due to their business model, I will look at their dividend yield, net asset value, current share price, WALE and their debt to equity ratio before I purchase the REIT at that point in time. Any more criteria will be nit-picking in my opinion.

On the other hand, stocks within the STI index are too volatile as there are too many big players vested in them. Any change in business model, strategy, net profit or dividend will cause big swings in the share price. With a hold and wait attitude, it will be best not to use these stocks as a target for this portion of the scorecard.

2. Any Stocks that Pass the Criteria will most probably be able to produce a Dividend Yield of 5% for the Following Year.

The point is to emphasize that a stock that passed this Dividend Scorecard Portion will have guarantee a higher probability to produce a dividend yield of 5% the next year, if you purchase it at that time and hold it till the next year.

Furthermore, the timeline for this strategy is only for 1 year. Investors must go back and analyse the data of the stock again after 1 year as information will have change then.

3. Dividend Yield = Interest Rate on the Fixed Deposit.

When creating this Dividend Scorecard Portion, my view is to deem the dividend yield similar to the interest rate of a fixed deposit.

“You buy, you hold, you wait for 1 year and hopefully get your dividend of 5%”. Thus, you ignore any volatility in between this 1 year of holding period.

On the other hand, if there is any major change fundamentally, it is important to go back and look at the financials of the stock again.

4. Reduction of Dividend is a Last Resort.

A major assumption while creating this Dividend Scorecard Portion is that a stock will not purposely reduce its dividend, unless something major occurs.

Even when the share price falls or economy turns bad, the stock will try to maintain its dividend amount or dividend payout.

5. The link between Share Price and Dividend

Increasing dividend may unnecessary increase the share price significantly. Decreasing dividend may unnecessary decrease the share price drastically.

Therefore, it is important to note that we are looking for a stock whose share price has not risen too much if there is an increase in dividend, as well as, a stock whose share price has not fallen too drastically due to a reduction in dividend.

How was the research done?

I started by looking for stocks that constantly gave out dividend yield of at least 5% from 2012 to 2016.

This data is not absolutely correct as it is tagged back to the current share price. Stocks such as Noble, which has been giving out dividend on a yearly basis, is deem to have produced 5% dividend yield every year. Experienced investor will know that this is wrong as Noble’s historical dividend yield is less than 2%. This happens is because of Noble’s significant drop in share price.

Nevertheless, these data still gave me a view of how stocks maintain their dividend yield and also which ratios are deemed to be important.

Therefore, coupled with my understanding of the financials, I came out with the following criteria for this Dividend Scorecard portion for the Enhanced Triple S Scorecard:

1. Value Stock Score has to be 7 or higher

In order for a stock to maintain dividend yield of 5%, the company may engage in negative actions such as increasing debt to provide the money for dividend or recognizing future income or significantly high non-cash item to facilitate earnings. These actions may cause the share price to drop more than the dividend amount.

Thus, with Value Stock Score from the Enhanced Triple S Scorecard portion having a score of at least 7, it will provide some comfort that the stock will not have any drastic fall in share price for that year that may offset the dividend yield that one will receive.

2. Free Cash Flow should be positive for the last 2 years

From my research, it seems that stocks that produce dividend yield of 5%, from 2012 to 2016, has been able to attain a positive net cash from operating activities on a yearly basis.

Therefore, since I only intend to hold this dividend stock for 1 year, I decided to look at only the last 2 years of Free Cash Flow for this criteria.

3. Dividend Yield for the last 2 years must be higher than 5%

With assumption that a stock will not reduce its dividend unnecessary, dividend yield is deem to be maintained at a minimum of 5%.

However, in the event that dividend yield increased from “less than 5%” to “5% or more” in the 2nd year, 2 other factors will be taken into account - The Price to Book Ratio and the Price to Earnings Ratio.

In order to pass this criteria, Price to Book Ratio must be below 0.8 and Price to Earnings Ratio must be below 14.

4. Current Ratio has to be more than or equal to 2

If a stock has to give out its cash as dividend, it must first be able to support its short term obligations with excess. If it does not have the ability to fulfill its short term obligations and have excess in return, then it will not have the ability to find cash and pay out dividend too.

5. Quick Ratio is more than or equal to 1.

Similarly, this ratio is looking at the stock ability to fulfill its short term obligations. However, it is looking from the point of view of solely using its cash.

A stock that need to pay out a high amount of cash as dividend, must have a high amount of cash FIRST.

At the end of the day, both current ratio and quick ratio is to provide the investors with some comfort that the company is able to continue its operations (without any drop in quality and standard) after providing the dividend.

In Short

For a stock to pass this Dividend Scorecard portion, it must pass all criteria. However, if one of the criteria fails but the stock maintains a dividend of more than 5% for 2 years, the Dividend Scorecard portion will still pass.

Do note that cash is the focus here and it has to be significantly high. A stock must have high cash amount to be able to give out high dividend.

However, this Dividend Scorecard is also not solely focus on Dividend Yield. It also protected the stock from any downside using the other 4 criteria.
A note of advice for all the “Yield Chaser” out there, a stock has to be fundamentally strong in order to continuously provide a high dividend yield. If you are solely chasing after the dividend yield of the stock, any significant drop in share price will have offset the gain in terms of dividend.

That's all for this post.

I will update the next post on the 4 stocks (which seems to have produce a dividend yield of 5% from 2012 to 2016) that I use to test the Dividend Scorecard Portion, as well as how some of the common "culprits" score in the Dividend Scorecard Portion.

For those who are interested to find out more about Enhanced Triple S Scorecard and its Dividend Scorecard Portion, you can come to my 3rd Sharing Session with T.U.B! I will be sharing how to use and input data into my Enhanced Triple S Scorecard and its Dividend Scorecard Portion with the participants of the 3rd Sharing Session. In addition, only participants of the 3rd Sharing Session will have the Enhanced Triple S Scorecard with the Dividend Scorecard Portion. If you are interested to attend, do not hesitate to contact me directly.

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  1. hi Does UPP satisfy your Div scoreboard?

    1. Hi Chan Vei,

      You may want to come to my 4th Sharing Session with T.U.B to understand the Div Scorecard to try it out!

      Haha.. but my initial view is there is a high probability it can pass.