You're listening to AC N A podcast. Hey, hey, everyone. It's Andrea Heng here on the Money Talks podcast with your weekly dose of advice on personal finance. Now, if you're new here, hit the subscribe button on wherever you are listening to us, Spotify, youtube music or Apple Pod. This is just so that you will be the first to know. You'll get that little ping alert whenever a
new episode drops. Now, I have my producer, Juani here with me today so I am going to get her to quickly give me the top financial headlines this week. Take it away, June, Andrea Heng. Yes. Are you a Boomer? How dare you ask me this question? No, I am not. I'm just kidding. Yes, I know you're not. But anyway, this just in baby boomers here in Singapore
are worried. Oh, why? According to a Euromonitor International survey conducted early this year, about only 55% of the baby boomers are comfortable with their financial situation in 2023 and they are generally pessimistic about their personal finances. In fact, about 26% believe that the situation will get worse. Oh, my goodness. That's not very good. You can't blame them though. Right. Because not only are the Boomers living longer but their parents are also living longer. So, cost of living is
also perpetually on the rise. That's right. And that's why Boomers are more careful when it comes to the spending. They are also spending more on health goods and medical services. Which understandable and also on education. Oh, that's good. Yay. For upskilling. Interesting. All right. What's next? All hot Chris. What is the hottest company in the world right now? Oh, wow. Ok. I know it's not Apple anymore. It's NVIDIA. That's right.
It's been constantly in the news recently first for taking over Apple and Microsoft to become the world's most valuable company, but only for a short while. So NVIDIA makes chips. Well, not the kind that we like to eat, but the ones that are really important. Ok. They are the chips that power, the oncoming A I tsunami, which is why everyone is asking how can I get a piece of NVIDIA. So that's the interesting thing. So the company's stock has
been on a crazy climb according to Forbes. If you invested $10,000 in the company five years ago, that would be worth $345,000 today. My goodness. But at the time of this recording things are looking a little less rosy. Ok. So you're telling me there's a bit of bad news on the front, the stock plunge that's my guess correct. OK. That's why you're the journalist, the stock has gone down 13% from its peak losing more than 500 billion
in US dollars in market value. Ok. So then the big golden question is, what will this mean for investors of NVIDIA? Naturally, they will be a lot more cautious now, right? But one thing is for sure, even though this tech darling has now moved down to the pecking order to number three, the story isn't quite over yet. I'm sure I agree here's to looking forward to more NVIDIA stories. So you like a particular company, you find its value agreeable.
You know, you like what it does, who its founder or CEO is or maybe you just like the logo, no harm in that. And perhaps you like it so much that you want to own a piece of it. One of the most common ways is to become a shareholder and buy the company stock. But can you only get a piece of a publicly listed company? And how do you go about owning a piece of that company? Let's ask Abel Lim, he is head of Wealth Management Advisory and strategy at UOB. Welcome to Money talks.
Thank you very much for the privilege of being here.
It is absolutely my pleasure. So as a start, give us the sharper summary of what a dividend stock is.
That's actually a really good question. So when you buy into a company, you're buying an equity of that company, the future earnings of that company, that's when you become an equity holder in that company. So the typical process of identifying a equity still persists. So in other words, you either have a top down approach, looking at the macros, looking at the industry that is participating in and why you should be buying into that company.
Because you believe in the growth of that company. Conversely, there's an alternate view which the bottom up approach, just looking at the company identifying its growth potential, its ability to deliver alpha or earnings for its shareholders and the sectors that is competing in. So you look at those companies, so those things don't change because you're buying into an equity of that company right now, your question was what is a dividend stock?
So the typical characteristic of a dividend stock is by and large, a more mature company, a company that has been around for a while, owns the greater part of the industry that they are competing in,
right? And when you say mature, how old would this company be? Roughly,
it varies in terms of industry. So the industry like the financial industry, typically you are talking north of 50 years, brick and mortar company who have been around, have weather through many crisis and market volatilities. This company tends to be a lot more stable, a lot better govern better rent. So these companies are considered mature, right? So typically when these companies are already mature, they do not need to have to reinvest every single profit back into the business
to grow. So essentially, now they have excess cash flow and they need to be profitable. Otherwise you have no money to pay out, right? So they need to be profitable and they have excess cash. That's when they decide to pay out a dividend.
Ah ok. So that's why the more mature or perhaps the more established the company, the better the dividend yield is, would that be the correct description?
Actually? Again, it depends the
company's performance as well.
The right way to think about it is you want to have a company that pays a consistent and a stable dividend as opposed to a company that swings wildly in terms of its dividend payoff because this can be for one detrimental for long term planning. Secondly, in terms of expectations, some companies pay very high dividends, but you got to understand why is it paying very
high dividends? Is it because it's truly growing, it's extremely profitable and hence paying dividends or is it just paying dividends out of cash flow?
Ah, understood. Ok. That's a really good caveat to have and to keep in mind. So thank you for that. So let me put it this way. As long as I have money, can I just go and buy a dividend stock?
Yes, you can. As long as you have the money to participate in these markets. Anyone can participate and go to a brokerage. Of course, there are certain age limits in Singapore before you can invest into our company. But essentially you need to understand the fees and the costs within, for example, buying into a share, there's a brokerage fee, there's custodian fee if you're buying into a foreign share, for example, there's withholding tax that you need to factor
into your overall returns. Fortunately, for us, Singaporeans, we don't have reporting tax. So that's one of the key benefits. Why foreign investors like to buy a dividend stock in Singapore?
Understood. Ok. Now I understand why Singapore is such an appealing place for them to go and buy dividend stocks. So one of the biggest barriers to any new investment product is where do we begin? So first, how do I know which ones to buy
when it comes to making an investment thesis? You need to have the right risk appetite for that particular investment vehicle that you have chosen by and large. For the first time, I would recommend going into an ETF or a mutual fund because that's possibly the easiest and possibly even the cheapest way for you to participate in the market. Most funds has a low minimum threshold of 500 to start with.
And then you can have regular investment plan that allows you to build on your investment and capital in the long run. The other benefit in a fund is that it's highly diversified. You don't have a concentration risk into one particular company, but to maybe access to 50 companies with very attractive dividends, not just locally but across different sectors and even globally. So that in itself is extremely attractive, but of course, that comes with a management fee, right?
So talk to me about that.
Ok, so when it comes to management fee, you will want to learn, look at the total expense ratio te of a company of underlying fund. So that takes into consideration the management fee, custodians fee and transactional fee. For example, basically it's like a service charge, it's a service charge. Yeah. So typically once you factor that in, that should be part and
parcel of your investment decision. Now if you have more ammunition, higher risk profile and you want to express a view, for example, your view is that rates are going to stay very high. Financial institutions will do extremely well because of a net interest margin. You may want to participate into a bank that pays very attractive dividend. But bear in mind you're holding a single equity, a single name and I'm not saying it will happen, but many things can happen when you have
such concentration. Anything
can happen. Basically, it's putting all your eggs in one basket versus spreading it out. Ok. So what is it that makes a good dividend stock?
Ok, typically, and I've touched on this earlier, these companies are mature, they have already added a lot of the volatility which the industry that they are still participating in have already trans. So a lot of this company have a well-established business, very well run govern at the same time and with very clear business models and it's identifiable who, where most of their income streams come from.
So it's very tried and tested,
tried and tested and also the fact that many of the risk has already been factored in or has been experienced. So they know how to manage some of this long term risk. So a lot of these companies again belonging to the blue chip space and widely recognized, not only in the domestic market but on a global stage,
right? And it makes me think about all the various companies that were mostly watched and scrutinized during COVID, a lot of aviation companies, for example, a lot of construction companies during COVID, some of these companies had cash infused in those situations. How are shareholders affected them because then that cash that you talked about, right, that extra profit that typically goes to
us as dividend payouts to investors. What happens to that when that cash has to be used for an emergency like COVID?
Excellent question. Now COVID was a exceptional time, not only for us but for any company that's operating around the world, but more importantly, the survivability of the company really does require the company to be able to evolve and be able to adapt to the COVID situation. Airlines for example, had a really tough time because no one was flying, no one is allowed to fly their revenue stream totally
grounded to a halt. So in the absence of which they actually focus a lot of their efforts towards the commercial side which is transportation of goods pivoting, it was pivoting and they managed to at least account for some of the revenue stream. So typically in periods of stress, like such companies will tend not to be so generous in terms of their dividend payout because they need to ensure that they are sufficient cash flow to
ensure the company survives during such difficult times. So obviously, you won't see an extravagant dividend announcement. Conversely when the markets are doing very well and the industry has picked up on there's exceptional profits. You will see companies like such announcing an exceptional dividend and a little bit extra to reward shareholders, investors for being loyal to them, holding their equities and staying with them during difficult times
when it comes to the shareholders sentiment, wouldn't that make the company sort of beholden to their shareholders to their investors? Because if I'm not getting a dividend this year, what makes me think I'm going to get it next year or in the future, even if the company is long established and has had those tried and tested moments.
So typically, when an investor buys into a company, there are two reasons particularly in a dividend stock, one, they want to buy it for the dividend yield which you articulated. So in terms of stress, they may not be getting a dividend. But if you look at the historical track record of the said company with a very stable and regular dividend payout, this does suggest that when things normalizes the company is capable of paying a similar
or even better dividend in the future. The other thing is that when you buy into a share in equity, you're also looking for capital appreciation. What's capital appreciation price movement? Ie by low sell high, that's the best way to make money in the market, actually the best way, the best way. So in terms of stress, again, company stock price will come
down because of the uncertainties, market sentiments are poor. People tend to sell down the share because maybe they are not so confident about the company's profitability during that period
or maybe in the future. Now, conversely, investors with the rigged appetite will actually see this is an opportunity I really should get myself into this share or this name because I think in the long term, not only will this company survive this current episode, it will thrive and do a lot better post episode and I will be in the money. So capital decision by low sell high. So
essentially the history of the company's performance and the opportunity for capital appreciation. These are the things that dividend investors would like to look out for. So when I invest in a dividend stock, I would expect some returns. So when is payday for dividend investors and how are they paid out? Ok.
It varies again from company to company, industry to industry as well. So dividends can come in the form of quarterly, half annually or even annually. So it really depends on the board of directors within the said company and their normal practices. So typically we see companies actually pay out on an annual basis and this money paid out in various form, it can be a in the form of cash. So it's a direct credit into your account. Conversely, you
can be paid via more shares, ok? And if you're paid more shares, you can either a sell those shares for money or for the long term investor reinvest it. So the best way if you have a long term horizon, reinvest the money because the moment you reinvest the money, you actually invoke the eighth wonder of the world, the
eighth wonder of the world. Tell me more.
The eighth wonder of the world is a power of compounding. So when you reinvest your money, you reinvest the share into the company, you create two streams of income, the natural income, which is the dividend payout. But because of the fact that you are reinvesting it, you're earning interest upon the interest or dividend upon dividend.
Ok? So it's really a good strategy to have it stacked on to each other so that you're just maximizing really your return optimizing
for sure.
Yeah. Yeah. Ok. So can a company decide to cut dividends and in some cases not even pay out at all?
Yes, a company can do that. It's within their jurisdiction. But typically when a company chooses to dial down or to cut dividend, it's usually a pretty bad sign that the company isn't performing particularly as well. There are certain challenges that they are gathering sufficient ammunition to meet and these are typically not ideal situation for a company to be in. So the news that goes out into the industry or to the markets tend to be pretty
negative when a company does cut or stop dividends. That is also one of the reasons why a lot of these dividends are more dud in the onset so that it doesn't send out the wrong signal,
ah, understood. So there's a lot of care that goes into sort of looking after what comes out of the company, be it dividends, be news, be it crises or even good news. There has to be a measure to everything. How often does such crises happen to established companies to the point where they decide? Ok, we need to cut the dividend and not pay you at all. How often does this happen
for very established businesses? Surprisingly, it's not very often. In fact, most of this company usually have some layer of additional fats or cash reserve that still there to pay out as form of dividend.
So enough of the doomsday talk, tell us what's the biggest benefit of owning a dividend stock.
There are many benefits when it comes to holding a dividend stock, but I do want about a pure dividend portfolio, but I might come to that later. The main reason why you buy into a dividend stock is to buy the stability and the consistency of the underlying company, you will experience a lot less volatility in terms of price movements. So typically there is a huge plus,
it is also providing a regular income for investors. Maybe people who are approaching retirement when you stop being able to exchange human capital for a salary and income, passive income becomes incredibly important. Dividend stock can play a very important role in terms of playing that passive income role alongside maybe fixed income coupon payments and rental, so and so forth. So dividend payout can also enhance the amount of money you have to spend on a monthly basis, extra pocket money,
extra pocket money per se. So if you think about it as the world gets older and Singapore is getting very old, yes, that natural demand for companies with the ability to pay out income will rise to prominence.
And I'll tell you what something else that will rise in the midst of all this, the pressure on these companies to stay healthy, to stay robust, maintain their ability to pay out those dividends,
especially when times like this, when artificial intelligence is already disrupting a lot of these major industries. I
mean, the rapid pace of it all, I think it's what's scaring because we fear that we may not be ready for it.
Most companies have invested significantly in that area. But you are right because the pace of this evolution is really fast, many companies will find that they are unable to keep up.
You talked about some of the upsides of having a dividend stock. What are the caveats though? What are the downsides that we need to take note of?
So when you think about investing, there's always a certain amount of risk because ultimately buying into equity, you are at possibly the bottom of the repayment rack. For example, if company becomes insolvent, said company, the creditors of the company, the bond holders will get paid first, ok? If the debt structure is not too complex, maybe there will be some left for equity shareholder. But typically in this situation, a shareholder may not be getting very much back.
Should the company become insolvent? Similarly, when you think about investing and I briefly touch about this point, if you're investing wholly into a dividend portfolio, buying all companies that pays a dividend, you tend to have a bit of a concentration risk to this point. The concentration risk is typified
by companies that seem to operate in similar sectors. Ok. So typically companies found in the utility space, real estates, financials, these are companies that are very established, but it also means that you have a lot of your exposure into a very narrow sectorial allocation. OK. So if you had a portfolio and in the past two years, you would have lost out because if you think about it, the magnificent seven that A I leaders of the world were
the top performers. You would have missed out in that gain by just purely focusing on a dividend defensive only strategy
understood. So diversification still the best advice out there for investors extremely so able, ultimately, who should have a dividend stock in their portfolio? Everyone. That's a great sell. I have to say Abel, it's been a pleasure. Thank you for being on the show and helping us understand the basics, the building blocks of dividend stocks and knowing the right questions really to ask ourselves before we decide to plunge into the world of dividend stocks. And I'm very sure that your advice will
come in handy. So thank you so much.
The pleasure is all mine.
All right. So before we let you go, we have a segment called questions from a hat. Just pick one hand it over to me and I will read it out. So, Abel, if you could have a meal with any public figure dead or alive, who would it be and why?
Oh, ok. Wow, that's simple. The founder of our country. Mr Lee Kuan Yew. I have tremendous respect for this individual, how he has turned a third world city into a first class nation. There's a lot to be thankful about today. The learnings that he said the trials and tribulations that he has to go through during the difficult period. I know many people also disagree with the way he got about doing things.
But you can't please everybody, you can't please everybody. There's no right or wrong because everyone was still feeling around and trying to get things right. So I have tremendous respect for Mr Lee. And then he has been a role model in terms of how I look at things and how I deal with life.
He was a formidable figure and you could even argue still is a formidable figure today. Now, listener, if you have been thinking about dividend investing, I hope this episode has been a comprehensive yet very easy to follow, guide to understanding the basics. Got a question or comment about this episode. Hey, send us a message. Money Talks is streaming on Apple podcasts, Spotify and youtube music. Rate us please. If you are enjoying the podcast credits to the Money Talks team.
Of course, Christina Robert Tiffany, Ang Jaini, Johari, Joan Chan and Tsai Yu. I'm Andrea Heng. Thank you for listening to Money Talks.