Dividend Stock Strategy - good enough for wealth accumulation?

For those investors who have preference for dividend, I am sure they must be aware that Uchitech is one of the dividend counters you will not miss.  Hence, I will not talk too much about its business and mainly focus on what kind of return can  a dividend stock like Uchitech provide?

At current price of Rm1.83 and basing on the FY16 dividend paid & proposed total 13 sen, the yield is at 7.1%. Is that good enough? Is dividend based investment a good strategy to accumulate wealth?

Let’s have a look basing on Uchitech’s past records if dividend stock strategy is one you may want to consider :-

	No of shares	Price	Total	% gain
Cost of investment	1,000	-RM1.20	-RM1,200.00
Bonus Issue 1 :10	100
Current Value	1,100	RM1.83	RM2,013.00
Capital Gain			RM813.00	67.8%
Dividend
2011			RM120.00
2012			RM120.00
2013			RM100.00
2014			RM100.00
2015			RM110.00
2016			RM55.00		8 sen final div not included
			RM605.00	50.4%
Total (Capital gain + dividend)			RM1,418.00	118.2%
Compounding Annual Growth Rate			13.2%

 

 The dividend received was not reinvested in the above calculation, otherwise, the CAGR will be higher than 13.2%. It appears that dividend return is almost 43% of total return from Uchitech and if one is looking for stable dividend income with gradual capital appreciation, the dividend approach can give a reasonable CAGR (in this case 13.2%).

Obviously there are some concerns one will have:-

1. Can the company continue to pay generous dividend
2. Is the cashflow able to support this high payout

For me, i will look at the followings to assess if future dividend payment can be sustained :-

1. Is the company having dividend policy, past dividend payment record, payout ratio
2. Is the company expected to generate sufficient profit and cashflow to sustain this dividend payout
3. What is the gearing level or existing cash position – net cash position? ( I do not like when company borrow or raise fund from other source to pay dividend or to dispose off asset to sustain dividend payment)
4. Is the company in capital intensive business and any expected big capital expenditure in near term

Having a dividend stock in one’s portfolio can provide the following advantages:-

1. fresh capital to reinvest & some companies has reinvestment plan at discounted price
2. predictable cashflow for meeting some of your living expenses, especially if you are a retiree
3. a little savings in transaction costs ( if there is no dividend and you have to sell some shares to raise the cash needed)
4. generally its stock price is more stable as dividend yield can attract institutional investors when it is at attractive level (eg Lembaga Tabung Haji has been trimming its stake in Uchitech but the share price still managed to sustain at the same level)

Better still if the dividend stock has a growing business, both the dividend and capital gain can grow at the same time and the effect on CAGR will be significant. I am monitoring Uchitech very closely as the last 2 years profit growth could be driven by favourable foreign exchange only but in its latest Annual Reports, it did mention a few projects will be launched this year and though no mention of potential contribution, it seems to provide some upside while the downside is limited as the financial performance and cash position of the company should be able to sustain the current dividend payment trend.  

If you think dividend based investment strategy is suitable for you too, start searching, I am sure there are many more dividend stocks on Bursa. Uchitech is just an example that dividend stock can also provide reasonable return over a long period of time. Yes, we all know the power of compounding!!

Compounding return p.a	13.2%
Initial Capital	RM      10,000	RM        20,000	RM            50,000
Year
0	RM      10,000	RM        20,000	RM            50,000
1	RM      11,318	RM        22,636	RM            56,589
2	RM      12,809	RM        25,619	RM            64,047
3	RM      14,497	RM        28,995	RM            72,487
4	RM      16,408	RM        32,816	RM            82,040
5	RM      18,570	RM        37,141	RM            92,852
6	RM      21,018	RM        42,035	RM          105,089
7	RM      23,788	RM        47,575	RM          118,938
8	RM      26,922	RM        53,845	RM          134,612
9	RM      30,470	RM        60,941	RM          152,352
10	RM      34,486	RM        68,972	RM          172,430
11	RM      39,031	RM        78,061	RM          195,154
12	RM      44,174	RM        88,349	RM          220,872
13	RM      49,996	RM        99,992	RM          249,980
14	RM      56,585	RM      113,170	RM          282,924
15	RM      64,042	RM      128,084	RM          320,209
16	RM      72,482	RM      144,963	RM          362,408
17	RM      82,034	RM      164,067	RM          410,168
18	RM      92,845	RM      185,689	RM          464,223
19	RM    105,080	RM      210,160	RM          525,401
20	RM    118,928	RM      237,856	RM          594,641