I have received a call from my auntie recently, trying to
get my help to look at a company she has invested more than 10 years ago. She
didn’t really follow what happened after she bought this stock. She realised
that the company’s share price is way below her cost (after 10 years) and all
the dividend received can’t even cover the capital loss (before inflationary
adjustment)! She thought by investing in stable business with good dividend
yield, she could just leave it and go on hibernation for 10 years. Now she got
a shock when “woke up” after 10 years.
Let’s have a look at what had happened to some of those once
known as solid dividend stocks in “stable” industries, it is no longer as easy
as “buy and hold” only. Competition, technological & legislation change, taxes
including GST that came into effect in 2016, etc all have impact on the stable
business we once thought would be recession proof (we were not even in
recession over the last few years).
- British American Tobacco
We can’t predict the future of a company as there are just
too many areas, from technological change, legislation, competition etc that
can impact a company’s business. But what we can do is follow the company/business
we invested from time to time and get updated on changes that may affect the
company through various sources of news, research, etc. If we are getting more
updates from time to time, we can action a little early.
Having said all that, is it time to find value in these companies
now?
If we can find a growing stock that pays good dividend, should we sell it if the price has gone up a lot?
ReplyDeleteFor example, we have bought a stock at Rm 1 and it paid 6 sen dividend, the yield then was 6%. After 1 year, the share price gone up to Rm 1,50 and the company is paying 8 sen dividend now, giving a yield of 5.33%. In actual cost yield, it is 8% because your cost is only Rm 1.
For decision making and comparing yields, I would use 5.33% but dividend return on my investment is actually 8%. Hence, stock at down cycle with good dividend yield can be a great dividend stock in the long run - provided the company is not in the sunset industry where its business cannot recover in the foreseeable future.