I mentioned in the article Fear and Greed that you have to prepare yourself mentally even as you want to tap opportunities during a bear market to buy fundamentally sound stocks that have become cheap or very cheap.
The Great Singapore Sale has started but I am actually more excited when the stock market is on sale. We don’t know when it will happen but here I will use the 5-Step Stock Investment Framework to prepare a list of dividend stocks I would love to own, and at a discount.
My Shopping List
Please do not trust my calculations and do your own due diligence although the sample table above will serve as my actual trading guide in terms of entry price!
During a crash, DBS for example may fall below $14, but once that price is reached, I will effectively start buying and will not look back as I will be buying at a discount or the dividend yield meets my rate of return expectation.
I take away a lot of fear factor if DBS drops further, $13, $10 or lower. In fact, if my investment budget permits, I may accumulate more.
When evaluating dividend stocks, there are a few factors to take into consideration:
- Dividend Payout is sustainable – you want to make sure the company’s earnings and free cash flow are sustainable to pay out the dividend track record.
- Dividend Payout ratio is not too high – if the dividend payout ratio is too high, close to 100% or higher for many years, watch out. If earnings don’t catch up, dividends will be cut eventually (think StarHub or SPH!).
- Company has low CAPEX – this ensures the company can distribute profits back to shareholders in the form of dividends instead of having to always reinvest into maintaining its operations.
- Dividend yield must beat risk-free rate and meet your return expectation – I would peg 5% minimum in the case of Singapore.
In my calculations above, I have built in some margins of safety and taken additional unique factors into consideration. Example, due to a fourth telco entering the fray in Singapore and thus greater competition, I am only going to consider SingTel at $3.
DBS does not quite meet 5% minimum dividend yield but I like it for the fact that if I can collect it at $14 which is about 20% discount to its current Net Asset Value (NAV), there is probably upside capital appreciation potential.
I love dividend stocks as they provide regular income streams. However, some people may still find a dividend yield of 5 to 7% not attractive enough. There are other strategies like investing in growth stocks and using options but those tend to require more investment skills, knowledge and experience.
I do not have a video for you this time but would like to invite you to join us for the next Financial Joy Weekend workshop happening on 10 June. If you would like to be a better investor and if you want to know how to double your money during the next market crash, come join us and we would be happy to answer questions you may have pertaining to stock investment and value investing in Singapore or US.