Kelvin Khoo Online

Dividends are usually cash paid back to the shareholders as a share of returns that the business or company made in the last financial period. The dividend yields paid out by companies vary across the different industries. The best dividends usually come from companies that create their own products.

Altria, formerly Philip Morris, famous for its world’s best selling cigarettes brand, Marlboro, was also very well known for its high dividend payments to its shareholders. A sum of US$1,000 placed in Philip Morris back in 1957, with its dividends reinvested, would have grown to almost US$4.6 million today, according to Jeremy Siegel’s 2005 book, The Future for Investors.

The good

Reinvesting the dividends paid out by the companies not only enables an investor to increase his holdings but also to compound his returns.

In his book, Mr Siegel said: ‘Long term investors who reinvest their dividends will find that the bear markets not only are easier on their portfolio but also can enhance their wealth.’

He continued: ‘If the price of the stock falls more than its dividend, and this almost always happens during market decline, then the dividend yield will rise. And a higher dividend yield is a ticket to higher returns.’

Investors who reinvest their dividends and accumulate more shares during the bear markets will eventually recoup the price loss because the lower price allows them to own more shares than they would be able to buy if the stock had not declined. Consequently, the value of these extra shares will surpass the magnitude of the stock price declines, making these investors better off overall.

For example, assuming one buys Wal-Mart at US$58 per share and thereafter, during a market correction, Wal-mart shares trade lower at US$42. With the dividends being reinvested at the US$42 price, it enables the investor to accumulate almost 30 per cent more shares than he would have had the price not declined.

In the long run, if the investor consistently reinvests the dividend he receives from Wal-Mart and in the process accumulates more shares, the value of his additional shares obtained will more than make up for any stock price declines the company suffers and greatly enhance future returns when the market recovers.

Hence, dividends not only give the investors constant liquidity and cash inflow, it also protects the investor in a bear market and enhances his potential returns during market recovery, given that the investor reinvests his dividends.

The bad

For large growth companies like those in technology and medical sectors, however, investors might generally not prefer to receive dividends since pursuing growth requires money and the availability of funds has a direct impact on the scale of the growth projects the company can pursue. If a company does not expect to grow and has excess money, it makes sense to pay dividends to its loyal shareholders. However, a company pursuing growth and expanding its empire will want to use the money in its coffers to continue its dominance and therefore should not be expected to pay out any dividend.

Another worthwhile place that the excess money can go to is in the repurchasing of the company’s own shares. Using earnings to buy shares instead of paying them out as dividends will reduce the number of outstanding shares of the company, thereby adding value to the remaining shares. Earnings per share will correspondingly increase and this will usually drive up share prices.

Instead of paying out its excess funds as dividends, companies may want to use them for reducing its debt. This is mainly because the company is constantly incurring interest expense on its debt. Therefore, it may serve the company’s shareholders better if the company were to reduce its debt and correspondingly lower its interest expense incurred.

Another scenario when dividends are bad news stems from the belief in a stock-market timing model called the Dividend Dip Indicator. This model recommends avoiding stocks when corporations are raising the dividends.

Consider two companies, each paid $1 dividend per share. The next year, one company leaves it unchanged while the other raises its dividend to $1.40 and then cuts the dividend back to $1 the year after. The latter company’s shareholders would seem to be better off because over the three year period, they received a higher payout than the shareholders of the former company. But in reality, the shareholders of the latter company are likely to suffer as the market in general will be likely to be taken aback by the dividend reduction and as a result, the company’s share price is likely to drop.

It is common knowledge that the management of companies only raises dividends if they are certain that they are able to sustain it in the long run and that the increase in their profits is not temporary. Consequently, the number of dividend increases tends to rise only after the economy has been in good shape for a considerable period.

Chances are that by the time the management acts on dividends, the market has already discounted the good news of the economy. And since the economy is cyclical, a good time to sell is usually when all the good news is absorbed by the market, that is, when companies raise their dividends. Thus, it is apparent that based on this counter intuitive model, dividends may sometimes be bad news for the investor.

So it’s not always good to head for dividend-yield stocks. Investors should always weigh all pros and cons before making their investment decisions.

Eighteen ETFs are listed on the Singapore Exchange (SGX), the latest of which made its debut last month - the Lyxor India Nifty ETF 10, a diversified stock index that accounts for 21 sectors of the Indian economy, including chemicals, oil and gas, banks and technology. Others listed here include the CIMB FTSE Asean 40 ETF, iShares MSCI India ETF, ABF Singapore Bond Index Fund and StreetTRACKS Gold Shares.

Also operating on the same principle are participation certificates, which, like ETFs, track the performance of an underlying asset or index on a one-for-one basis. Those on SGX include the ABN Amro Indonesia Index Zero Cert, ABN Amro Pakistan Index Zero Cert, Dow Jones Euro STOXX50 Index Zero Cert and Kuala Lumpur Composite Index Zero Cert. This month, ABN Amro launched new certificates linked to the Rogers International Commodity Enhanced Index or RICI Enhanced, which comprises 37 listed commodities including energy, agriculture, industrial and precious metals.

‘The main difference between ETFs and Zero Certs is in the legal framework,’ explained Miles Ashton, ABN Amro’s head of sales and public distribution of private investor products in Asia. ‘For an ETF, the assets are segregated from the balance sheet of the issuer, so it’s a fund, whereas Zero Cert is a security issued by - in our case - ABN Amro.

‘The difference is that an investor buys a fund in one case and in the other, (he buys) ABN Amro paper that is linked to the performance of an underlying index.’

Another difference is that Zero Certs have a tenor or maturity period of three years, while ETFs are open-ended.

Shares in each ETF and Zero Certs can be bought and sold via a broker, like any equity. Investors will need two accounts: a trading account with a stockbroking member of SGX, and a securities account with the Central Depository. They can then buy or sell the instruments - which are traded intra-day and in board lots - through their broker or online trading account. Once issued, the price of an ETF or Zero Cert moves up and down in line with the target index.

Advantages and risks

One of the factors that make ETFs and Zero Certs attractive is that they are cheaper than unit trusts or mutual funds.

‘The costs are relatively similar for both (ETFs and certificates), which are much lower than actively-managed funds,’ said Mr Ashton. ‘If you buy a fund from your broker or consumer banker, for instance, it’s 3 to 5 per cent of upfront loading fees and management fees of 2 per cent per annum.’

Conversely, for an ETF, about 0.75 to 1.5 per cent per annum of asset is deducted from the investment daily, while for the Zero Cert, the issuer receives after-tax dividend of the index components.

Another factor is that both vehicles enable investors to get their foot into specific markets and asset classes, including shares of companies listed on overseas exchanges, thereby offering them diversification.

‘I see an ETF as an investment tool rather than an end-product. It helps investors build a customised portfolio,’ said Joseph Ho, managing director and head of ETFs in Asia at Lyxor, which has eight ETFs on SGX. Investors bullish on India, for instance, can allocate a percentage of their investment into the market through ETFs and reap returns should their view prove correct, he explained.

Mr Ashton said of certificates: ‘The platform can be summed up by saying it’s essentially like a supermarket for retail investors, where they can pick from a variety of different Zero Certs linked to investment themes and create their portfolios.’

However, the ETFs’ performance is directly affected by that of their underlying component stocks or bonds. The impact, however, is cushioned to some extent by diversification, as an ETF itself is a diverse pool of stocks or bonds.

Another risk to consider is the possibility of tracking errors. An ETF may sometimes not reflect the performance of its underlying index due to factors such as timing differences between countries.

‘When the ETF is not doing what it’s supposed to do, when you want it to give a return but it doesn’t replicate its benchmarked index, you’re in trouble,’ warned Mr Ho. ‘It’s something investors have to look out for.’

Bright future for the market

ETFs were first introduced in the US in 1993, and have grown to more than $250 billion today. And while Asia has only recently started playing catch-up to that, the products have been growing in popularity.

At an ETF conference in late February, Morgan Stanley managing director and head of investment strategy Deborah Fuhr said Asia ‘will see many more (ETF) products coming on the market and a lot of people using them here, as well as elsewhere’.

Mr Ashton has also seen ‘tremendous growth in this area already’, but noted that more education is needed for Asian investors to familiarise themselves with the products.

‘Here in Asia, the market is at the more junior stage compared with that in Europe,’ he said. ‘But I think it’s a matter of education and awareness-building, and investors will see that the track record of these rule-based certs or ETFs has outperformed active fund managers who charge a much steeper fee structure.’

Net property income totalled $49.6 million or 8.8 per cent above forecast. ‘CapitaCommercial Trust achieved higher rental income as Singapore experienced considerable rental growth in the office market over the past 12 months,’ said Richard Hale, chairman of CapitaCommercial Trust Management, which manages the trust. ‘This growth, together with our strategy of pro-active asset and prudent capital management, increased the first-quarter 2008 distribution per unit significantly by 22.7 per cent over the same quarter in 2007.’

Mr Hale said that if the acquisition of 1 George Street at a purchase price of $1.165 billion is approved and completed, CCT’s total asset size will grow to $6.5 billion, ahead of the target of $6 billion by next year.

‘Given Singapore’s still-strong economic fundamentals and continued healthy office leasing demand, we are confident of exceeding the forecast distribution per unit of 10.04 cents to unitholders in 2008,’ he said.

Lynette Leong, chief executive of the manager of the trust, said that there is continuing keen demand by banks and financial institutions for greater space in CCT’s quality buildings. CCT’s portfolio includes Capital Tower, 6 Battery Road, HSBC Building, Starhub Centre, Robinson Point, Bugis Village, Golden Shoe Car Park and Market Street Car Park.

Grade A and prime office rents averaged $18.65 per square foot (psf) per month and $16 psf per month respectively in Q1 2008, representing increases of 8.7 and 6.7 per cent from the preceding quarter.

‘Given the prime quality of CCT’s portfolio, we have signed leases above $20 psf per month in Q1 2008,’ Ms Leong said. ‘Our well-balanced lease expiry profile, together with our pro-active asset management, will enable us to benefit from the tight office market . . . and gain continued rental upside.’

This was attributed mainly to income from its one-third interest in One Raffles Quay Pte Ltd, the acquisition of which was completed on Dec 10, 2007.

K-Reit said the contribution from One Raffles Quay was $10.9 million, comprising income support received from the vendor, interest income and dividend income.

Distribution per unit (DPU) for the quarter was 4.6 cents, or 1.3 percentage points more than forecast. K-Reit said this amount will be included in the advance distribution payout, estimated to be 6.45 to 6.5 cents per unit, for the period Jan 1 to May 7, 2008.

Net property income for the quarter was $9.1 million, or 41.5 per cent higher than $6.5 million in the corresponding quarter in 2007. This was underpinned by higher gross rental income from properties, K-Reit said. Gross rental income increased 30.2 per cent year on year to $11.2 million in Q1 2008.

Committed occupancy of K-Reit’s portfolio is 99.6 per cent. With the contribution of the one-third interest in One Raffles Quay, the average monthly gross rent of its portfolio grew 69.4 per cent year on year and 14 per cent from end-2007 to $6.86 per square foot in March 2008.

K-Reit is now engaged in a rights issue. The expected gross proceeds of $551.7 million will be used to partly repay a bridging loan of $942 million drawn down for the acquisition of the one-third stake in One Raffles Quay.

This will reduce K-Reit’s aggregate leverage from 53.9 per cent to 27.7 per cent and provide it with additional funding capacity to acquire further properties.

The rights units are expected to be issued on May 8.

K-Reit said it expects to benefit from positive rental revisions, given its current rents are below market rates and that 42.2 per cent and 20.2 per cent of its portfolio’s net lettable area is due for lease expiry and rent review respectively between 2008 and 2010.

K-Reit’s units closed one cent higher at $1.41 yesterday.