Dividend investing has always been an attractive investment strategy for Singapore investors to earn passive income. S-REITs and bank stocks have been popular choices for dividends among local investors, and high dividend stocks have historically outperformed the market, especially during periods of greater market volatility.

But it’s not all sunshine and roses. Dividend investing still requires research and due diligence to ensure that the company one invests in has long-term profitability and healthy balance sheets to sustain dividend payouts.

Let’s explore what to look out for in dividend investing, and whether it is a suitable strategy for your financial goals.

What is dividend investing?

Dividend investing refers to selecting stocks from companies or REITs that are able to pay relatively high and consistent dividends. The frequency of dividend payouts is typically quarterly, semi-annually, or annually. 

As dividends are portions of a company's earnings that are distributed to shareholders, essentially, you would want to invest in companies that are profitable. 

A major plus point of dividend investing in Singapore is that there is generally no dividend tax for individual investors unless they are received through a partnership or listed on foreign exchanges, such as US-listed stocks. Locally listed companies are typically exempted from tax, which explains the popularity of S-REITs and local bank stocks for dividends.

‍Read more: REITs vs stocks: Which should you choose for better dividend returns?

How is a dividend payout calculated?

For example, if you own 1,000 shares of company X for $10 each, your total investment value is $10,000. Company X pays a $0.50 annual dividend per share of its stock.

 Over the course of a year, you will receive a dividend payout of $500 ($0.50 x 1,000 shares). That would mean a yield of 5% ($500 divided by your investment value, $10,000).

The dividend yields available online may not reflect the actual yield you receive as an investor due to factors like the timing of your stock purchase, dividend payment dates, and any changes in the stock price or dividend payouts after the yield was calculated. Always verify the most recent dividend announcements and consider the purchase price of your shares to determine your actual dividend yield.

3 Key metrics to identify the best dividend stocks in Singapore

Payout ratio

There is no ideal number for a good dividend payout ratio. Payout is dependent on the sector that the company is in. Generally, it should beat inflation minimally, which has averaged about 2% per year in the long term. A consistent and stable payout ratio is equally important.

Dividend yield

Again, there is no such thing as an ideal yield level. More importantly, if a company comes with a high dividend yield, look further into the company’s underlying financial strength, such as its earnings stability, profit margins, and debt levels to determine its ability to sustain consistent payouts in the future.

Dividend growth rate 

The dividend growth rate is a less common measurement. A strong history of dividend growth could be a signal that the company is profitable in the long term and that future dividend growth is likely. 

Choosing good dividend stocks in Singapore is more than just looking at the dividend yields. Ultimately, the fundamentals of the company are the ability to sustain dividend payouts in the long run, and protect or grow your capital investment.

Dividend investing is no sure bet

In the case of individual stocks, dividend payouts can vary on company earnings, meaning that they are variable and can be adjusted or even skipped. 

The crushing impact of the global pandemic in 2020 and low interest rates hit HSBC, which announced to suspend its dividend. Even though the lender pledged to restore dividends to pre-pandemic levels, it is a reminder that a dividend policy serves as a guide, but the regularity and the payout itself is not guaranteed. 

Since there is a risk of companies cutting their dividends, there is no guarantee that you will receive a stable payout. You can lower this risk by focusing on a company’s ability to increase and consistently distribute dividends, instead of its dividend yield. 

One easy way is to study a company’s financial profile:

1. Total revenue tells us the ability of the company to sell its products
2. Net income tells us the ability of the company to make profits
3. Cash flow from operating activities tells us the ability of the firm to pay off its liabilities 

This would be a signal that the company is profitable and has a healthy cash flow to maintain a steady dividend payout.

More ways to gauge the sustainability of dividends

Macro factors aside, dividend payouts are more or less aligned with a sustainable business model and recurring cash flows for the company. Investors should exercise caution by:

1. Looking at the driver of increasing dividend yield. Some companies may appear to be dividend growers, but that might be simply because the share price has been falling, which is artificially boosting its dividend yield.
   
2. Ensuring the dividend growth is financed by increasing profits of the company instead of debt. 

When a company decides to reinvest their income, the money will be pumped back into the business to boost the company’s growth, instead of being used to pay out dividends to shareholders. This may disappoint investors who have the sole intention of getting dividends.

Finally, when companies do not meet their expected earnings or are facing diminishing earnings, their stock price may fall as many investors decide to dump the shares. That will mean lower capital gains for investors.

Is dividend investing suitable for you?

The concept of earning a passive income through dividend investing is appealing. It is not a necessity in every investor’s portfolio.

Investors who may find dividend investing useful

Stable dividend payouts can provide additional income to support expenses.

Working individuals find it useful for regular mortgage payments or allowances to loved ones.

Retirees or near-retirees who prefer stability and reliable income streams to support their lifestyle during retirement could find dividend investing ideal for ensuring consistent cash flow and capital preservation.

Investors who appreciate the lower volatility and risk associated with dividend stocks could find it a useful diversifier in portfolios heavily skewed towards growth. 

Investors who may not benefit from dividend investing

For investors with a longer time horizon and a goal of maximising capital growth, the relatively moderate returns from dividend investing may not be the best use of investment capital.

This is especially so if the dividends are not reinvested, or worse, used to support increased discretionary expenses. If you don’t intend to use these dividends and have a long runway to invest, you could be better off investing in instruments with the primary objective of capital growth.

Dividend investing strategies for Singapore investors

If you have decided that dividend investing is suited for your goals, it can be a very powerful and sustainable investment strategy for passive income. 

To choose the best dividend investments suited for your risk tolerance and goals, here are some tips.

How much to invest for dividends

How much you should invest for dividends depends on your financial goals, risk tolerance and investment timeline. 

1. Review your budget: Dividends are not guaranteed – ensure you have enough funds to cover your living expenses and emergencies before investing.
2. Assess your financial goals: Determine what you want to achieve with your investments, and where dividend investing plays a role in reaching your goal, such as generating additional income or creating a steady income flow near retirement.
3. Evaluate risk tolerance: Understand your comfort level with investment risks. Dividend stocks and REITs can offer stable income but may also fluctuate in value.
4. Make a financial plan: Allocate a percentage of your portfolio to dividend-paying stocks, calculated based on your expected dividend yields. Don’t forget to diversify your investments across different markets, sectors and asset classes to fit your risk tolerance.

Diversify your investment portfolio with the best dividend unit trusts

Besides investing in single dividend stocks, you may also consider investing in dividend-yielding funds that give you diversification across sectors and markets for a more robust portfolio. Explore the Endowus Income Portfolios, each balanced for differing payout and capital preservation or growth goals.

Explore dividend and income unit trusts on our Fund Smart platform, catering to different investing styles and goals. These funds are chosen for their robust levels of payouts and that are backed by unique investment strategies. With our 100% cashback on trailer fees and access to institutional share class funds, you will get the most cost-efficient solution on Endowus.