High-yield, low-payout stocks stand out

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High-yield, low-payout stocks stand out
Strategy tends to outperform others in most rising markets


By CONRAD TAN

INVESTING in stocks that offer high dividend yields but pay out only a small proportion of their earnings tends to outperform other strategies in the long term, according to Credit Suisse analysts.

Outperform: M1 is among Singapore stocks with dividend yields of up to 6.3% a year at current prices but pay out as little as one-third of their profits as dividends

'High-yield, low-payout essentially means you are buying yield stocks that are trading at a low price-earnings ratio', or value stocks, its analysts said in a report on Asia-Pacific equities last week.

Such an investment strategy tends to outperform others in rising markets except in the bubble phase, they said. Also, 'a low payout implies that these companies are retaining cash for growth which also helps long-term performance'.

They analysed stocks in Asia-Pacific markets for the best-performing strategies during the period January 2009 to June 2010.

In Australia, China, India, Indonesia, Japan, Malaysia, South Korea and Taiwan, buying high-yield, low-payout stocks would have earned investors the highest returns over that period compared with other strategies, they found.

The other strategies tested included buying stocks that paid no dividends; stocks that had high dividend yields; stocks with both high dividend yields and high payout ratios; stocks with low dividend yields and low payout ratios; and stocks that had low dividend yields but high payout ratios.

The performances of the various strategies were also compared with that of buying an overall portfolio of stocks for each market.

'For most markets, the high-yield low-payout strategy was the best performing strategy followed by the non-dividend paying stocks for a few markets,' the analysts said.

Stocks that pay no dividends are also called growth stocks. Instead of seeking dividends, buyers bet that the share price will increase substantially so they get large capital gain when they sell the stocks.

In Singapore, stocks that paid no dividends showed the biggest returns over the period examined. But investing in high-yield, low-payout stocks was still the best-performing strategy over a longer period of 15 years examined in an earlier study, the Credit Suisse analysts said.

Among those they consider to be high-yield, low-payout Singapore stocks are telco M1, rig builders Keppel Corp and Sembcorp Marine, transport group ComfortDelGro Corp, real estate developer Allgreen Properties and conglomerate Sembcorp Industries. (Createwealth8888: Yeh, I have Kep Corp and Semb Corp in my portfolio)

These stocks have dividend yields of up to 6.3 per cent a year at current prices but pay out as little as one-third of their profits as dividends. All are rated 'outperform' by Credit Suisse.

Other stocks, such as Fortune Real Estate Investment Trust and property firms MCL Land and United Engineers, have dividend yields of over 3 per cent a year but pay out less than a quarter of their earnings as dividends.