Last Updated on February 27, 2022 by Rat Race Running
Disclaimer: Before you continue reading, please take note that the information provided in this post is based on the author’s research, personal experiences, and available market information. Any stock mentioned in this post is not a recommendation to buy or sell.
Dividend investing is a relatively simpler way to create a passive income portfolio better suited for longer-term and moderate-risk investors.
Though several financial instruments pay dividends, like PAG-IBIG MP2 and cooperatives, for this post, we will focus on cash dividend investing through the Philippine Stock Market.
If you’re still new to the stock market and want to know more. In that case, I suggest that you read my earlier post about the stock market for beginners before you continue reading this. Click this link.
What are dividends?
Dividends are a portion of a company’s earnings that they pay to its shareholders. Some companies give out dividends once a year, while some give semi-annually and even quarterly.
However, it is essential to note that not all publicly listed companies pay dividends. In fact, some large and established corporations do not give out dividends.
For dividend investing, the first thing that you need to do is to check which companies give dividends and rank them by their dividend yields. You may check them out through the PSE Edge portal, through your broker, or the Investa charting app.
In some cases, companies with large excess cash can give one-time dividends on top of their regular dividends. These are called special dividends.
Please take note that special dividends are not assured, so you may avoid including them when computing for your dividend yield, which you’ll learn later.
What is dividend investing?
From my previous post, I mentioned two general ways of earning through the Philippine stock market. The first is through capital appreciation, where you buy low, then sell high (PSE does not support short selling yet), and the other is through dividends.
Basically, dividend investing is an investing strategy wherein an investor buys a publicly listed company based primarily on its historical dividend yields or the percentage of the dividends they regularly give per year. Then whenever you receive a dividend, you re-invest it back into the stock market.
The higher the dividend yield, the better. And since dividend investing is a long-term investment strategy, dividend investors usually select companies that have consistently paid their shareholders dividends year after year regardless of the general market trend.
The best companies for dividend investing consistently give out more than a 5% dividend yield per year. Anything below 5% can already be beaten by high-interest digital banks or even PAG-IBIG MP2.
Please take note that dividends are subject to a 10% withholding tax.
Finding the company’s dividend yield.
The dividend yield is the ratio of the dividends it gives per year divided by its stock price. Below is the formula:
Dividend Yield = ((Dividend) / (Stock Price)) x 100
For example, if a company’s price per share is P20.00, and it pays out P1.00 per stock as a dividend, then P1.00/P20.00 = 0.05. Multiplying 0.05 by 100 gives you 5% as its dividend yield.
Usually, the dividend yield is computed using the current share price. However, you can also calculate the dividend yield based on your average buy price of the stock.
For example, $GMA7 regularly pays out high dividend yields annually.
$GMA7 gave P1.35 per share in 2021, and the current price per share is at P14.60 (as of January 16, 2022). If we compute the dividend yield using the current share price, we will get P1.35/P14.60 = 9.24%. That is already pretty high. But what if you bought GMA7 stocks at a much lower price?
Say you bought GMA7 stocks on January 15, 2021, at P6.00 per share. If you compute the dividend yield, you’ll get a ridiculously high yield of 22.5%. Please note that the 2021 dividend payout of GMA7 was higher than their usual 5-7% dividend yield.
If you’ll notice, aside from the high dividend yield of GMA7 last 2021, if you bought shares at P6.00 per share, and its current price is P14.60, then your capital would have already increased by as much as 160%. This is on top of the dividends!
Here’s another example of a company best suited for dividend investing, $DMC.
In April 2021, $DMC gave P0.48 dividends per share. During that time, the price of $DMC closed at P5.75 per share before the ex-date. So if we’ll compute for the dividend yield, it is 8.35%.
However, suppose we will re-compute their dividend yield (excluding their special dividends) at the current price of P8.50 per share. In that case, their dividend yield for 2021 will shrink to 5.65%. However, though the dividend yield decreases, it is easily covered by the price appreciation of almost 50%.
So, you can see that though dividend yields may decrease due to the increase in stock prices, in some ways, they just get canceled out.
If dividend investing is great, why won’t more people do this?
Many people don’t want dividend investing simply because it is boring. Yes! Dividend investing is boring because you don’t actually care about the stock price, as long as they pay out consistently high yields.
Dividend investing is also for the patient. Since dividends are paid once, twice, or four times a year, there is not much happening in your portfolio.
Though some people participate in dividend plays, they usually buy before the stock’s ex-date and immediately sell after.
Important dates that dividend investors must know
Generally, there are four important dates that you should know relating to dividends.
This is an example of a dividend disclosure from PSE Edge.
- Declaration Date is when a company’s board of directors announces the approved dividends through a company disclosure via the PSE Edge portal. If the declared dividends are high, this may increase a stock’s share price for a short time until the ex-date arrives.
- Ex-Dividend Date or Ex-Date is the first day that a stock trades without a dividend. This date is typically a few days before the record date. During the ex-dividend date, the company’s share prices commonly drop as traders price-in the dividends to its market price. Simply put, you’re still entitled to receive dividends even if you sell them on or after the ex-dividend date.
- Record Date is when investors must be on the company’s books for them to receive dividends. This date is commonly confused with the ex-dividend date. So, remember that as long as you bought your stocks before the ex-date, you’re good.
- Payment Date is the day investors who bought shares before the ex-date get paid. The dividends are usually debited in your broker account.
Here is an example of what you’ll see from a company’s Dividend Information from PSE Edge.
- The first column is the type of security – whether it is common or preferred.
- Next is the type of dividend, which is usually between cash or stock dividend.
- Next is the dividend rate – how much is the dividend per share?
- Then we have the dates mentioned above, the ex-dividend dates, record dates, and payment dates. The Declaration Date is when these types of disclosure first appear to the public.
Identifying which type of companies to buy
In the stock market, you can generally choose from three types of companies to buy stocks for dividend investing.
The first two, common and preferred shares, significantly differ in voting rights. The common stocks have voting rights, while preferred stocks don’t.
However, voting rights are not an issue for retail investors like us since we don’t have the millions or billions of pesos to buy enough shares to participate in the voting. So, let us take a look from an entirely dividend-based perspective.
These stocks function similarly to bonds wherein an investor lends money to a company. In return, the company pays the investor a fixed percentage of dividends, ex. 7% – which is usually higher than that of common stock.
You can buy preferred shares in the open market – similar to common stocks. However, they are not as actively traded. Another way to buy them is during their preferred shares offering, similar to an initial public offering (IPO).
Below is an example of preferred shares offering announcement.
However, preferred shares generally don’t move as fast as common stocks. So buying preferred shares is not the best way if you want to build your wealth through capital appreciation.
You may notice whether a stock is preferred based on their name and stock symbol, which usually has a Pref in it.
For example, $DDPR is the preferred share of Double Dragon.
If you notice, there are almost no recognizable chart patterns, simply because they are not made primarily for their price action. However, you can see that they regularly pay out dividends, as shown by the green arrows.
Common shares or common stocks are what you would commonly buy in the open market for capital appreciation.
In terms of dividends, they could vary from no dividends to as high as dividends given out by preferred shares.
Just to reiterate, you can still receive dividends even if you sold your stocks on or after the ex-dividend date. Here is an example of a cash dividend notice.
Take note that dividends are subject to a 10% withholding tax.
REITs or Real Estate Investment Trusts are relatively new investment vehicles, which only started in the Philippines in 2020.
I think of REITs as a hybrid of common stocks and mutual funds. Instead of buying into the company, you only buy a portion of real estate investments with minimal capital investments.
The great thing about REITs is that they are mandated by law Republic Act 9856 to pay 90% of their net income as dividends to their investors.
REITs are primarily traded for their dividends, but sometimes they can have capital appreciation similar to common stocks.
Currently, there are five REITs listed in the Philippine Stock Exchange as of December 31, 2021. But there are already new REITs lined up for an IPO this 2022.
When to Switch?
Dividend investors’ goal is to maximize their dividend earnings per year. But as time goes by, there is a possibility that dividend payouts may soon go down.
When that happens, it would be better to sell your shares and shift to a higher yield stock since you have most likely also gained from capital appreciation.
My personal rule is to ensure that the dividend stock I am holding on to has at least a 5% dividend yield for the previous year.
Dividend investing is a great way to build passive income. It is also relatively more relaxed than actively trading in the market.
Just remember to reinvest the dividends you received to maximize compounding.
Dividend investing is for the long haul, so make sure that what you’re buying are solid companies. Patience will be the determinant of this investing strategy’s success.
Happy investing, and God bless!
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