This article first appeared in The Edge Malaysia Weekly on April 23, 2018 - April 29, 2018

DIVIDEND yields have been on the rise, so it is not that difficult a task to find a stock with a yield above 5%. Yields have been rising since the recent stock market rout , which hit mid to small-cap counters especially hard.

Now could be a good time to nibble on dividend stocks with a good track record of regular payments and high earnings visibility.

“In a weak stock market cycle, it could be worth paying attention to shares that pay good dividends. When share prices are not going up and you cannot sell them at a profit, the only recourse is to hold onto shares that provide good dividends. This way, you would at least have a steady stream of income,” says Inter-Pacific Securities head of research Pong Teng Siew.

Areca Capital CEO Danny Wong opines that low share prices and rising yields give investors a better entry point.

But yields are only one part of the equation and investors should also take into account the inverse relationship between share price and dividend yield. When share prices rebound, yields will drop, unless these companies are raising their dividend payments.

The sustainability of dividend payments and yields, says Pong, hinges on the companies’ business prospects.

“If business slows down and earnings become weaker, it is natural for dividend per share to decline,” he says, adding that if a company’s earnings are growing, the current yields would not be a good yardstick.

“You have to do your homework, paying attention to whether a company’s higher dividend for the year was due to a one-off bonus because it sold off some assets or if the bottom line has improved,” Poh says.

To a certain extent, historical dividend yield may come in handy for investors to separate the wheat from the chaff. A typical dividend stock, says Wong, has steady earnings and dividends are doled out on a regular basis, for example, firms that have a dividend policy.

Gearing is another indicator to watch out for when evaluating a company’s ability to pay out regular dividends. A highly geared firm may not be in as strong a position as one in a net cash position, simply because the former incurs interest expenses that eat into cash flow.

High yields from unexpected counters

Many would expect real estate investment trusts (REITs) to head the list of high-yield counters.

Interestingly, Tambun Indah Land Bhd topped the list of companies with a market capitalisation of RM300 million or more (based on April 16 closing prices), with a dividend yield of 13.2%.

However, the Penang-based developer’s total dividend per share (DPS) of 7.7 sen declared for the financial year ended Dec 31 (FY2017)  was lower than the 10 sen paid out in FY2016. Notably, its revenue and net profit for FY2017 were lower — RM282.01 million and RM83.39 million respectively — than the previous year.

The increase in dividend yield is mainly due to the 22% drop in its share price since the beginning of the year. It has halved from last year’s peak of RM1.42 per share in mid-May.

Apart from Tambun Indah, Tong Herr Resources Bhd and Star Media Group Bhd were also at the top with dividend yields of above 10%.

Tong Herr’s yield is 11.8% based on the 36 sen DPS proposed for FY2017. The stainless steel fastener manufacturer’s revenue was up 21% while net profit climbed 27% for FY2017. Despite the better earnings performance, its share price took a beating, declining 22% since the start of the year to RM3.05 as at April 16.

Star Media’s indicated dividend yield is 11%. In FY2017, shareholders were delighted to receive a total DPS of 42 sen, which included a 30 sen bumper dividend following the disposal of Singapore-listed Cityneon Holdings Ltd. Excluding the bumper dividend, the group’s DPS was 12 sen. Based on the past three years, the media group doled out dividends of 18 sen per share.

The company remains in a net cash position of RM377.76 million as at Dec 31, 2017. But in terms of share price, the publisher of the best-selling English daily suffered a decline of 31.6% between Jan 2 and April 16. It closed April 16 at RM1.09 per share.

It is worth noting that among the top 55 companies with high dividend yields, only nine firms’ share prices have risen so far this year. They include Malayan Banking Bhd, SHL Consolidated Bhd, Boustead Plantations Bhd, Sime Darby Bhd, Atlan Holdings Bhd, UOA Development Bhd, Matrix Concepts Holdings Bhd, ELK-Desa Resources Bhd and Paramount Corp Bhd.

The-one-time market darling dividend stock, British American Tobacco (M) Bhd, saw its yield rise to 7.2% as its share price plunged close to 40% to RM23.34 on April 16 from Jan 2. The market cap of the tobacco company has been reduced to RM6.66 billion.

Another sin stock that is on the list is Berjaya Sports Toto Bhd,  with a yield of 7.2%. The share price of the number forecast operator, however, has been resilient, declining only 2.2% since the beginning of the year. But, compared with a year ago, the counter has declined 20.6%. It closed April 16 at RM2.09 per share.

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