20 June 2012

Capital Appreciation vs Dividend Income

While I was still reading on the book "The Battle for Investment Survival", something crossed my mind and pompted me to re-think about the objective of investment.

In the market, if you more conservative and not willing to take additional risk, you may often look for the more certain investment options, such as investing in bonds, high yield stock with lower growth / business risk and so on. While we cannot avoid the market risk (the risk when we are investing in the market and we cannot predict the market movement whether it is going down or up), we can select on certain lowe Beta stocks with the intention to earn the dividend income in the market.

No doubt we can easily find a 8% dividend yield or above counter in the market, but the common problems for those counters with high yield are either fall into one of the groups below:
  1. Lower potential growth due to high dividend paid out ratio. The higher earnings distributed to the shareholders indicates that the management does not have aggresive plan to expand further. Rather, a consistent dividend paid out plan would only attract investors that only want a certain dividend to meet their low investment return objective.  If the company would like to maintain high dividend ratio while expanding aggresively, the only thing it can do is to raise the financial cash flow, which will eventually result in higher debt ratio / diluted earnings.
  2. High dividend yield could be due to super low price or unsustainable dividend. In this case, we should avoid to invest in these counters. A high trailing dividend yield does not always means a high expected dividend yield. This happens in cyclical industry, such as commodities / off-shore marine / logistic / property development / construction etc.
From my previous experience, my successful shares investment counters are those in the growing industry, with the remaining earnings are reinvested in new projects. No doubt, this could increase the volatility of the capital invesmtent, but it actually will bring more opportunities of getting capital appreciation in long term.

Should we sell off all the shares before market collapse and re-enter the market after the market collapse? So far, I always remain consistant stock-to-portfolio percentage, but I would apply tactical asset allocation by making use of the market condition to re-adjust the stock-to-portfolio percentage, to stand a better chance in long term investment.

4 comments:

  1. Hi Jack,

    Noticed that you started a Malaysia Investment Bloggers site...I'm the admin for Singapore Investment Bloggers, shall we do a link exchange for both sites under affiliated sites?

    Cheers,
    Royston

    ReplyDelete
  2. Hi Royston,

    Thanks for your message.

    You are welcome to do so. Anyway, I am now more active in Singapore Shares market compared to Malaysia market.

    Rgds,

    ReplyDelete
  3. The way you analyze is good. Please keep writing such articles.

    Singapore dividend stocks

    ReplyDelete
  4. A smart investment requires special skills, each and every one of which we can learn with practice. For example, when we learned to walk, we became more intelligent because we overcome all challenges and stage failures, and when we finally returned to crawl anymore.

    high dividend stock Singapore

    ReplyDelete

Related Posts Plugin for WordPress, Blogger...

View All My Posts Here