How Do I Pick Strong Dividend Companies That Can Survive Recessions?

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In these tumultuous times, investing in the stock market may seem daunting.

With many stocks being battered down, they could be selling at enticing dividend yields, giving investors a massive headache when it comes to choosing the sustainable ones to invest in.

Should you pick StarHub Ltd (SGX: CC3), with a dividend yield of 6.3%, or choose Overseas Education Ltd (SGX: RQ1), which yields close to 10%? Or do both companies not make good dividend stocks?

How about Hutchison Port Holdings Trust (SGX: NS8U), which has a much higher dividend yield than say, Singapore Exchange Limited (SGX: S68), but may not necessarily make a good investment for the long-term?

So, to make things easier for dividend investors out there, here are three simple criteria for picking strong dividend companies that have the ability to withstand recessions.

Before we get to the steps, as investors, we must realise that not all dividends are created equal.

A stock that has a lower dividend yield may be a better dividend share than a company with a higher dividend yield. 

A high dividend yield, as compared to its peers, may mean that the company is fundamentally weak and thus, has a depressed share price.

On the flip side, a low dividend yield does not necessarily mean that the company is a lousy one.

It may mean that the company’s share price has run up a lot due to its strong business. 

So, instead of looking at dividend yields in a vacuum, we should focus on three other aspects of a company if we are investing in it for its dividends. 

Those factors are:

  1. Earnings and free cash flow growth 
  2. Dividend payout ratio
  3. Balance sheet strength

Let’s explore why those criteria are more important than the headline dividend yield of a company.

1. Earnings and free cash flow growth

Firstly, dividend companies should exhibit stable growth in both earnings and free cash flow.

Earnings (also known as net profit) are what is left after a company pays off all its expenses, such as cost of raw materials, salaries, and taxes using its revenue. 

On the other hand, free cash flow is cash flow from operations minus capital expenditure.

A company’s free cash flow shows how much money the firm has to dish out dividends to shareholders, buy back its shares, reinvest into its own business, or pay off debt (if any). 

A company with consistently growing earnings and free cash flow over many years hints to us that it has a strong business, and that’s what investors want.

Such a company would also be inclined to pay out higher dividends as its business grows over time.

For example, Singapore Exchange hopes to pay a sustainable and growing dividend over time, consistent with its long-term growth prospects.

On the flip side, a company with falling earnings and free cash flow would be pressured to cut dividends or worst still, stop paying dividends entirely, to sustain its business.

An example of such a company is Hutchison Port Holdings Trust, whose earnings have tumbled over the years, and consequently, seen its dividends being slashed drastically.

2. Dividend payout ratio

The dividend payout ratio tells investors what percentage of a company’s earnings or free cash flow are paid out yearly as a dividend.

I prefer businesses that pay less than 80% of their free cash flows as dividends. 

This gives enough margin of safety in case the business takes a short-term hit for any reason.

For example, if a company has a 50% dividend payout ratio, it would mean that free cash flow has to fall by more than 50% before dividend may be cut. 

A 50% dividend payout ratio would also mean that there’s space for dividend growth in the future if free cash flow doesn’t grow as much, before a 100% dividend payout ratio is hit. 

Some companies have a fixed dividend policy of paying out a certain amount of earnings as dividends.

For example, Valuetronics Holdings Limited (SGX: BN2) has a formal dividend policy of declaring 30% to 50% of its earnings as ordinary dividends each year.

On the other hand, companies that pay out more than 100% of their earnings or free cash flow as dividends may have to cut dividends to bring them to more sustainable levels. 

An example of a company cutting its dividends is StarHub. It had to slash its dividends from 2017 onwards as they were unsustainable.

3. Balance sheet strength

The balance sheet reveals the financial strength of a business.

Companies with lots of cash and little or no debt have the financial muscle to navigate through tough economic conditions.

Such companies don’t have to worry about paying off exorbitant interest expenses when revenues get hit during tough times.

Banks hounding on their backs during a recession is the last thing that companies want.

As mentioned earlier, free cash flow can be used to pay dividends or pay off debt.

If a company doesn’t have loans to deal with, it can focus on things that matter, such as keeping shareholders happy with higher dividends or reinvesting into its business for further growth.

It can also use the opportunity to acquire other companies at cheaper valuations during an economic downturn, setting itself up for greatness when the economy recovers. 

Parting Thoughts 

I hope that you are now armed with the right knowledge to pick dividend companies that can withstand recessions.

Don’t get me wrong.

If companies possess all three criteria listed above, it doesn’t mean that their dividends are 100% guaranteed (nothing is guaranteed in investing anyway).

It just means that you tilt the probability of investing in companies that pay out sustainable dividends in your favour.

With that, happy dividend hunting!

What My Son Taught Me About Life

My son just turned one last month.

What an incredible 13 months it has been.

As cliche as it may sound, time has really flown past in a blink of an eye.

It seemed like just yesterday I was holding the fragile him right after he emerged out of my warrior wife’s womb.

I have been wanting to write this post for some time, but I just couldn’t get the time to sit down and do so.

But now, with the one-month circuit breaker measures in Singapore, I finally have some breathing space to pen my thoughts down.

Luckily so, the delay has been a blessing. I can weave in more stories and lessons that my son has opened my eyes to.

So, here are the eight things my son’s birth has taught me about life.

1. We were given an identity when we came into this world

We didn’t name our son until around after two weeks he was born. In his first few days of life on Earth, we had to bring him for a routine checkup at the polyclinic that all newborns go through.

At registration, the nurse asked me what my son’s name is. I told her he doesn’t have a name yet.

At that moment, I was hit by a huge realisation.

I realised that when we came into being, we were nameless and without any identity.

I go by the name of Sudhan, but before that name was created, I was “nothing”, or without any label.

It is by being given a name that we identify with it, and fight for that name to be heard.

Maybe it’s called the ego.

I came across an article, A Name Is Only a Label, on the internet that also mentioned what I felt then:

“Every child comes into the world without a name, but we have to give a name; it has some utility. It is absolutely false, but in a vast world with millions of people it will be difficult to manage if nobody had any name; it will become almost impossible to manage. Some names are needed; false they are, but they work, they have a utility. They have no reality, but utility certainly they have.

But ordinarily you grow with your name; in fact, you become conscious only later on. Your name is deeper than your consciousness, hence there arises an identity with the name. You start feeling, “This is my name, this is me.””

2. The meaning of the full cycle of life and death

My ammayi (grandma) passed away in 2014.

Upon seeing someone close to me pass on, I realised that we can’t bring any possessions with us when we expire. My grandma’s clothes were just left lying in her brown, wooden cupboard.

Whatever we have attained from this world (e.g. status, money, relationships, etc.), we leave it here when we go. There’s no point fighting over things that are temporary.

But I only fully understood the full cycle of life and death after I saw my son being born.

As I was heading to the MRT station a few days after his birth, I saw a funeral procession under one of the blocks.

At that moment, it hit me hard that when there’s birth, there’s death.

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3. Trust the power of nature

For nine months, the foetus was gestating in my wife’s womb.

Every single month, there were changes to the size of the foetus and different organs were developing.

27 August 2018

All these were happening without our conscious input.

I couldn’t hasten the process, nor could I slow it down. Everything was happening at its own time.

So, we shouldn’t worry about life when things don’t go the way we want it to. We just need to trust the universe to give us the best.

If we don’t get what we want when we wish for it, maybe it’s not yet time, or maybe there’s something better out there.

4. Be in this moment

Babies are a joy to be with as they are always in this moment, not worrying about the past nor the future.

As I see my son play with his toys happily or randomly plod around the house, I get reminded that we should always be present and enjoy life as it is.

Before my son was born, I came across Instagram posts by my friends, who are parents, that babies grow up too fast.

So, from day one, I told myself that I should enjoy every moment of nurturing him, be it waking up in the middle of the night to change his diapers, showering him, or carrying him to sleep at 2am.

When he’s all grown up, he might not even have time for me, so I should enjoy every moment I have with him now.

Looking back, he has really grown up too fast.

I can’t get back those moments anymore, but I’m glad I was fully involved as a father during those times.

I was also lucky to be working from home as a freelancer so I could witness all his various milestones from birth to seven months (that was when I had to go back to full-time work).

5. Have a beginner’s mind 

Babies are doing many things for the first time. What may be second nature to us is something brand new for them.

And since it’s super new, they see the world in awe.

That’s the beginner’s mind at play.

I realised I need to have the beginner’s mind when I live life to see things from a fresh perspective.

For example, when reading a book to my son, it might be boring for me, but with a beginner’s mind, I can see how babies see the world. I can then rediscover the world’s awe through him, and because of him.

6. It’s all in the mind 

Before my son was born, I would get agitated and feel lethargic if I didn’t get my seven to eight hours of sleep each night.

After my son was born, especially in the first few weeks, I rarely got an eight-hour slumber.

But I was fine. I had the energy and drive to be present with my son.

So, those moments of feeling irritated due to a “lack of sleep” was all in the mind.

7. Always be resilient 

When my son falls down or accidentally knocks against something, he cries for a while.

But almost instantaneously, he forgets about the pain and is all joyous once again.

During those moments, I get reminded about the power of being resilient.

8. Never, ever, give up 

My son learnt to turn from his back to his front when he was around three months old.

It took many attempts for him to master that skill.

Many a time, he would just fall back to his back. But after many tries, he finally got the hang of turning in one fell swoop.

When he first started to learn to walk, he fell down numerous times on his bum (Huggies provides great cushioning!). But he just got up and tried again.

From those episodes, I learnt that we should never give up trying.


Eventually, we will see it through.

Thank you, son.

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