You will be able to read a dividend announcement and tell a regular payout from a one-off.
Wei Ling bought her first SGX stock last year because a colleague said it paid well. In March she got a small payout, in August a bigger one, and then in November an unexpected third payment that was larger than both. She added the three together, divided by the price, and decided the stock yielded almost twice what the websites said. She was about to buy more.
Before she does, she needs to know where each of those payments came from, because they are not the same kind of money.
Lesson 1.1, Why the share price drops on the ex-date, showed that a dividend is part of the company's value handed to you in cash. The next question is what the board is allowed to hand over, and what it can afford to.
In Singapore, a company pays dividends out of its profits. That is the legal rule, and it is set out in the Companies Act. But profit is an accounting figure, and a dividend is paid in actual money. A company can report a healthy profit and still be short of cash, for example if its customers are slow to pay or it has just spent heavily on new equipment. So in practice the board looks at two things: whether there are profits to pay from, and whether there is cash to pay with.
A company can pay out more than it earns for a while. It can use cash saved from good years, borrow, or sell an asset. None of these can go on for ever. A business that keeps paying more than it brings in is running down its savings or running up its debts, and module 3 covers how that usually ends.
Most companies pay in step with their reporting. A company that reports results every half year will often declare an interim dividend with its half-year results and a final dividend with its full-year results. The final dividend usually needs shareholders to approve it at the annual general meeting, which is why it often arrives a few months after the year has ended.
Many Singapore companies pay twice a year on that pattern. Some pay once, some pay every quarter, and S-REITs commonly pay half-yearly or quarterly. The frequency tells you nothing about how generous or safe the dividend is. A company paying S$0.02 four times a year pays the same as one paying S$0.08 once. What matters is the total over a year and whether it can continue.
Wei Ling's March payment was the final dividend for the previous year. Her August payment was the interim dividend for the current year. Those two are the regular pattern.
Her November payment was a special dividend. The announcement said so, and it said why: the company had sold a building and decided to return part of the gain to shareholders.
Special dividends come from one-off events. An asset sale, a disposal gain, a large tax refund, a year of unusually high profit. They are real money and worth having, but they do not repeat on any schedule. The company may never pay another one.
This is where Wei Ling's sum went wrong. With made-up figures, say her stock trades at S$5.00, the final was S$0.12, the interim S$0.14 and the special S$0.20. The regular payouts add up to S$0.26, which on S$5.00 is 5.2%. Add the special and the total is S$0.46, or 9.2%. The second number looks far better and will not be there next year. Lesson 2.1, Dividend yield looks backward, comes back to this when you work out yields yourself.
Read the announcement every time. SGX requires companies to announce dividends on SGXNet, and the announcement names the type of payout. If it says special, treat it as a one-off.
Some companies and many S-REITs run a scrip dividend scheme. When a dividend is declared, you can choose to receive new shares instead of cash. The company sets an issue price for the new shares, often at a small discount to the recent market price, and divides your dividend by it to work out how many shares you get.
For the company, the attraction is that the cash stays inside the business. That can be sensible when it has good uses for the money. It can also be a quiet way of paying a dividend the company cannot fully afford in cash, so look at how many holders take scrip and whether the scheme was switched on just as cash got tight.
For you, scrip means more shares and no cash. Your share of the company grows a little relative to holders who took cash. Whether that is useful depends on whether you wanted the income or wanted to reinvest anyway. Check the scheme's terms on the announcement: the issue price, how fractions are handled, and the deadline to choose. The terms also say what happens if you do nothing, so read them before the deadline passes.
When a dividend announcement appears on SGXNet, four things tell you what kind of money it is. The label: interim, final, special or something else. The amount per share. The period it relates to, such as the half year to June. And whether a scrip option is attached. Keep those four together and you will not repeat Wei Ling's mistake of adding a one-off to the regular income.
In the activity you will go back two years through one company's announcements and sort every payout by type, which is exactly the record Wei Ling needed before she bought more.
Read the last two years of dividend announcements for one SGX company and label each payout as interim, final, special or scrip.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).