Top Tips! HIGH-DIVIDEND STOCKS

Safe, boring and simple income accumulation is the historical means to generating long-term wealth but do high-dividend stocks still match that criteria? Boon Tiong Tan takes a look

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In this world where interest rates are close to zero almost everywhere, savers and retirees are finding it hard to earn a decent return on their money. One ever popular way to get a higher return than the paltry interest offered by banks is to buy high-dividend stocks.

What are dividends? They are mostly cash, though occasionally shares, paid to shareholders from companies’ profits. The distribution of dividends is entirely at the management’s discretion. It can be zero even when a company is profitable, and it can vary from year to year. In the US, dividends are mostly paid quarterly; in Hong Kong, they are paid half-annually or annually. Non-US residents have to pay a 30% tax on US-listed companies’ dividends. For every dollar of dividend you receive, 30 cents is deducted straight away. There is no dividend tax for companies listed in Hong Kong.

If a company pays a total annual dividend of US$3 and the share price is US$100, the dividend yield is 3%. The dividend yield of the S&P 500 Index (a stock index consisting of the 500 biggest US-listed companies) is about 1.3%. This is much lower than the historical average of 4%. Hang Seng Index, the benchmark Hong Kong stock index, is paying almost 3%.

Where can you find companies with high-dividend stocks, providing an annual dividend yield upwards of 5%? Simply use the stock screeners on financial websites like FT.com and WSJ.com. Plug in 5% or even 7% as a cut off, and the screener will show you a list of stocks with higher than 5% or 7% dividend yields.

HSBC WAS PAYING MORE THAN 6% DIVIDEND YIELD PRIOR TO THE PANDEMIC. THE UK REGULATOR FORCED THE BANK TO STOP DIVIDEND PAYOUTS LAST YEAR TO PRESERVE ITS CAPITAL.

RISKY BUSINESS
Over the years, high-dividend stocks have gained a reputation for being ‘safe, boring and simple’ but they’re not that straightforward. It’s unlikely that you just buy a high-dividend stock and live happily ever after. There are misconceptions about these stocks; they are not as simple and safe as you might assume.

Many high-dividend-yield stocks are in industries that pay generous dividends, such as utilities, telecoms and banks. But these industries are not as safe as some believe. In 2008, investment bank Lehman Brothers went bankrupt and Citibank nearly followed. Germany’s largest power producer RWE was facing bankruptcy a few years back when the government made an energy policy change.

The share prices of these ‘simple and safe’ stocks are also more volatile than you might think. Prices can easily move a quarter or more in a year. Link REIT, the first real estate investment trust in Hong Kong and currently the largest in Asia, is offering a 4.5% dividend yield and its 52-week high to low is 25%. China Construction Bank, one of the big four banks in China, is offering a 7.2% yield and its 52-week high to low is 27%. Ping An Insurance is 4.8% and 53%.

While share price volatility is a concern, a downtrend in share prices poses an even bigger problem. A high dividend is not a guarantee that the share price will hold up well. Fairwood, a fastfood chain that offers generous dividends (in an industry that is perceived as safe and defensive), has seen its share prices drop by more than half in five years. Likewise, China Mobile, which offers a 7.2% dividend yield, has been in a downward trend since 2016, losing more than 60% from its peak.

Many investors who choose to buy high-dividend stocks are attracted by the ‘certainty’ that they’ll get the same dividends (or more) regardless of ups and downs in stock prices. From time to time, however, they get a rude shock. Kraft Heinz, a big company in the shelf-stable prepared food industry, that has Warren Buffett as its biggest shareholder, cut its dividend by a third in 2019. Singtel, the dominant telecom company in Singapore, cut its dividend in 2020 for the first time in decades. And closer to home, Lee Ka Shing flagships CK Hutchison Holdings and CK Asset Holdings chose to cut dividends last year despite having enough funds to maintain them.

REGULATORY RISKS
Another thing to consider is that dividend policy can face regulatory risks. In Macau, as a result of ongoing policy changes, casinos may need to consult the government before paying out dividends. Sands China, which was the most generous dividend payer among the Macau casinos, saw its share price dive 51% in the third quarter of 2021 – compare that to a low-dividend casino stock, such as Galaxy’s 36%. HSBC, one of the most popular high-dividend stocks among Hong Kongers, was paying more than 6% dividend yield prior to the pandemic. The UK regulator forced the bank to stop dividend payouts last year to preserve its capital.

Long-term HSBC shareholders, who held the stock during the Global Financial Crisis, know well that a dividend cut to zero is not the worst thing that can happen.

In March 2009, HSBC launched the biggest ever rights issue in the UK, asking shareholders for GBP12.5 billion to shore up its shaky balance sheet. At the rights issue price of HK$28, 60,000 Hong Kong shareholders did their part and in total contributed more than HK$40 billion. Many of these shareholders depended on HSBC’s dividend as income; not only did they lose this income they were called upon to part with more hard-earned cash.

Some high-dividend stocks are low grade, affording high yields because their future is uncertain and dividends are in doubt. This pushes the price down and the yield up, and it can be a deadly trap for investors who are attracted to the high yield but ignore the weakening earnings and balance sheets. Examples of such companies are numerous and include some big names. When Evergrande Group, one of the biggest property developers in China, was suspended on October 4 this year, its dividend yield was 6.1%.

Is there an alternative to buying high-yield stocks? A surer way to get decent returns? Yes, there is. You can sell options. Next issue, we’ll take a look at what’s involved. Stay tuned. DB resident Boon Tiong Tan (CFA) has worked as a trader with banks like HSBC and Morgan Stanley for over 20 years, and he is the author of A Stock Investment Book For The 99%.

For information about the one-on-one courses (money management, stock investment, options trading and chess) that he provides for both adults and kids, email [email protected].