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Picking the right dividend stock

how to pick a good stock that pay dividend malaysia

Up next, it’s time to learn how could we pick a good dividend stock. To be a good dividend stock, for me personally, it should satisfy several criteria:
  1. DIVIDEND YIELD HIGHER THAN 5% (FIXED DEPOSIT OFFERS A RATE AT AROUND 4.2%).
  2. PROVEN RECORD OF CONSTANT DIVIDEND PAYMENT BY THE COMPANY.
  3. INCREASING DIVIDEND PAYMENT ANNUALLY (DOES NOT EQUAL TO INCREASING DIVIDEND YIELD)
  4. HEALTHY DIVIDEND PAYMENT
First of all, a DY higher than 5% is a must! Investing in stock comes with a higher risk than putting your money into FD. Hence, the amount of risk must be justified by a higher rate of return. Based on my two cents, it is good to pick a stock with DY higher than 6.5%. (Bank around 6.5%, REITS around 8-9%, construction/property counter is in discount now, around 10%!!!)

Secondly, ensure the company has a good dividend payment history. This means that the company should have been giving out dividend for at least the past three years. If the company gives out 10% dividend in 2012, 0% in 2013, 5% in 2014 and 1% in 2015, I think this is not a good option because it is not consistent enough. It is better to get a company that pays out 6% constantly than this. Furthermore, if the company is giving out dividend for the first time ever, it is advisable to wait and observe further. Remember it is never too late to buy a stock, right timing is the key.

Thirdly, a good dividend stock should have its total annual dividend payment increased yearly. Since DY is affected by current share price, hence, if a company’s share price increases 50%, the amount of dividend payment must increase in proportion too to ensure the DY remain the same as before. Furthermore, a dividend payment that increase from year to year also signifies that the company is growing well and the management is generous to keep rewarding their shareholders.

Lastly, it is up to personal judgement to determine if the dividend payment is healthy or not. A normal operating company will have its dividend increase when their revenue increases. Even so, the amount of dividend paid will increase slowly, but not suddenly. Hence, if on this one lucky day, you notice that a stock is offering 25% DY, be careful, careful and careful. Sometimes, thing is too good to be true. A high DY counter could be a trap!

Let’s think. If a lousy company that is making loss suddenly pay out a high dividend, do you really believe it? The best thing to do is to find out why the company suddenly do so! Most probably, the company is selling off asset such as equipment or plant to obtain that amount of money. Although selling off assets could be beneficial to company at time (provided that the asset is useless to company), it is still a good practice to check and judge whenever a company gives out an unusual large amount of dividend. If you find out that the high dividend payment is just one off case and is not constant, perhaps it is better not to join the buying crowd.

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