Published September 27, 2008

Stocks In Focus
Dividend yields don't tell the whole story

The figures could have been bumped up by exceptional dividend payouts in a particular year. By Jamie Lee

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THE downward spiral of share prices has created impressive dividend yield figures for some stocks on paper.

But before one runs to buy them on the assumption that they are 'defensive stocks', look harder into the headline numbers.

Some of the yield figures have been inflated by exceptional dividend payouts last year by many smaller companies. Several small firms had dished out dividends to use up their tax credits, which expired at the end of December last year.

BT compiled and ranked stocks according to their gross dividend yields - which are calculated by dividing the latest full-year dividend per share with the last-done share price.

Among the 10 top stocks based on gross dividend yields, more than half had declared exceptional dividends in 2007 due to tax credits or one-off capital reductions, including Hiap Moh Corporation, Allied Technologies, Nobel Design Holdings, Qian Hu Corporation and Miyoshi Precision.

The tax credits allowed shareholders to claim a refund for the dividend. This is calculated as the difference between an individual's tax rate and the corporate income tax rate, which stands at 18 per cent.

Hiap Moh Corporation and Allied Technologies - which both paid generous dividends last year - showed dividend yields that more than doubled.

Precision stamped metal parts firm Allied Technologies posted an interim gross cash dividend per share of 4.26 cents in 2007 to pass on its tax credits, pushing up its gross dividend yield to 122 per cent. But no dividend was declared by Allied Technologies in 2005 and 2006.

Track record

Interior designing firm Nobel Design Holdings had declared a gross interim dividend of 5.8 cents per share last year.

But based on the compiled list of dividend payouts for the firm, the only other dividend issued by Nobel Design was in 1997.

Paper trader Hiap Moh Corporation came out tops with a hefty 136.2 per cent dividend yield. It had paid a special gross dividend of six cents and a bonus gross dividend of 20.7 cents per share, on top of their final dividend of 0.5 cents for its financial year 2007 ended December.

But in this case, shareholders can take comfort in Hiap Moh's track record in paying dividends. From 2001 to 2007, the firm had paid out at least 1.25 cents in final dividend to shareholders.

The same is true for fish supplier Qian Hu, which had an exceptional payout last year. The company dished out a special interim dividend of 8.54 cents last year, but this followed a first and final dividend of 0.6 cent in 2006 and another first and final dividend of 0.5 cent in 2005.

Still, given the general lack of assurance on dividend payout from such companies, blue chips are a safer bet - albeit more expensive in absolute terms - as most analysts have pointed out.

'Investors should look at bigger companies with a dividend policy, strong earnings over the past few years,' said one analyst from a local bank.

Profits are tied to the dividend payout as the latter is dished out from the company's retained earnings. Firms which are more established typically do not need to reinvest their profits for expansion purposes and hence choose to pay them out to shareholders.

Among the blue chips, Singapore Airlines Engineering ranks top with a gross dividend yield of 8.5 per cent. Though the company said it has no dividend policy, it has been paying out dividends over the last eight years.

It paid out a total gross dividend of 20 cents. This was preceded by a total dividend payout of 12 cents in 2006 and 30 cents - comprising a final dividend of 26 cents and an interim dividend of four cents - in 2005.

Blue chips

Keppel Corporation, which has a gross dividend yield of 7.5 per cent, said that it aims to distribute up to 60 per cent of its full-year Patmi (profit after tax and minority interests) as dividends. Its unit, Keppel Land, has a dividend policy of distributing up to one-third of its net realised profits to shareholders.

Neptune Orient Lines ranks third with a dividend yield of 6.9 per cent. The company said it has a dividend policy to either pay an annual dividend of eight cents per share, or a full-year dividend of 20 per cent of net profits, whichever is higher.