Investing for dividends: the overlooked investment

A good recommendation would be based on the risk appetite of the individual investor and his expectations on returns. In my opinion, a carefully selected dividend-focused investment, be it in the form of outright dividend-stock purchases, real-estate investment trusts (property funds) or even mutual funds that are invested in dividend stocks, is for everyone.

The risk-return profile of a good dividend-focused investment is simply too good to be ignored. However, equity investors these days seem to be plagued by market volatility, with investors paying too much attention on capital gains and not enough on dividends. As it is now normal to see the stock index swing 3-5 per cent a day, many investors think they can pocket quick returns from trading by using market timing.

So why bother to invest for dividends? Well, one good answer would be - stability. A discussion about dividend-focused investment can last forever. In this article, we shall concentrate on the most familiar investment choice: dividend stocks.

Investors can purchase listed stocks outright via brokers or invest via mutual funds. Although there is no exact set of rules that sets dividend stocks apart from the rest, these stocks can be broadly classified as those with a record of consistent dividend payment.

Naturally, for companies to be able to pay consistent dividends, they must generate high cash flow from operations and keep minimal capital expenditures. We all know capital expenditure is indicative of business expansion; hence, a classic dividend stock is not likely to have explosive earnings growth in the near term. The subdued earnings growth results in a less-demanding valuation in price-to-earnings terms compared with a high-growth stock, and the more predictable future earnings leaves little room for speculation. Thus, a dividend stock is normally less volatile.

Talking about volatility, the Stock Exchange of Thailand (SET) Index has standard deviation of returns in the range of 20-27 per cent, while a classic dividend stock has a much lower standard deviation at 10-15 per cent. It is also worthwhile to note that the SET Index is one of the highest-yielding indexes in the region, with a 4-per-cent dividend yield.

It is surprising to see investors chase after high beta stocks in hope of ultimate capital gains when stable return investments with a potential rerating upside just lie in front.

As an investment professional, I also consider dividend funds a good measure of a fund manager's ability, because it takes more than just numerical analysis to spot a quality dividend stock. Qualitative factors play an equally important role as quantitative factors, and the less-liquid nature of dividend stocks leaves little room to recover from bad bets. As for Ayudhya Fund Management, our dividend funds have posted some encouraging numbers, with an annualised return of 13 per cent a year and a standard deviation of 13 per cent since the inception date in 2004.

The SET Index has an an-nualised return of 9 per cent a year and a standard deviation of 20 per cent over the same period.

Thalit Choktippattana is an equity-fund manager at Ayudhya Fund Management.