Monday, 13 April 2015

Growth Or Dividend?

When I started to invest in stock market seriously since mid-2013, I have a clear plan.

I plan to invest only in small to mid cap growth stocks, hold for longer term until the day I think its growth has stopped or slowed down significantly.

Dividend is not that important to me.

I have to do this as I have limited seed money to start with, and I think my priority is to grow the money as fast as possible so that I can accumulate enough fund for retirement, which is my ultimate goal.

If I can reach retirement later, I plan to put more money into lower-risk investment vehicles such as fixed deposit, bond funds or blue chip stocks, and hope to survive on interest & dividends earned.

Basically I don't invest solely for dividends at this stage, but if the growth stocks pay good dividends along the way, then it's a bonus.

As we know, dividend yield = annual dividends per share / share price. High dividend yield may not necessarily mean good.

For example, a blue chip stock's share price is at RM10 and it pays 60sen dividend a year. So, it has 6% dividend yield now.

If its profit grows consistently year after year, it will pay higher dividends as long as its dividend payout remain the same, and its share price will go up accordingly as long as the market gives it the same PE ratio. 

Lets say its profit doubles after 10 years and it has similar dividend payout. If the market gives it similar PE ratio, its share price will be doubled to RM20 and dividend will also be doubled to RM1.20 per share. Its dividend yield will still be 6%.

After 10 years, even though its dividend yield is still 6%, investors enjoy 100% capital gain and more actual dividends in cash. 

If the company's profit is flat for 10 years, dividend payout and share price will stay stagnant but investors can still get 6% return every year which is still better than current FD rate of 3-4%.

However, if the company's profit is deteriorating year after year, its dividend payout and share price are likely to decline as well. 

Lets say if its profit drops by half after 10 years, its share price and dividend will fall by half as well to RM5 and 30sen respectively. Its dividend yield is still high at 6% but investors not only suffer 50% paper loss, but also less actual dividends received along those 10 years.

We have to pray that our dividend stocks deliver at least flat results, if not growth, to increase our wealth.

So focusing solely on dividend yield might be misleading, especially when the company has some one-off gain and gives one-time special dividend.

Anyway, stocks are called blue chips because they are huge and stable, has significant competitive edge or monopoly in their business, and has proven track record.

So it's unlikely they will give persistent deteriorating profit over many years though profit might still fluctuates. However, undoubtedly growth will be slow and limited.

For me, growth is still the most important part of my investment.

So I plan to invest in high dividend yield blue chips stocks only after accumulating enough money for retirement.

Typical textbook teaching tells us that growth stocks tend to give little or no dividend as they need more money to grow. 

However, from my experience so far, I find that many growth stocks can give better dividends than blue chips, and their share price certainly move up much faster than blue chips.

Why not investing in such stocks?

Some examples are Inari, Gtronic, Pintaras, BJAuto, Homeritz, Poh Huat, LiiHen, Wellcall, VS, Matrix, Huayang, Tambun etc...

Of course we don't expect the growth will continue forever.

There will be a time when property, smartphones or furniture demand drops, and when the great time for O&G and plantation finally arrives, those growth stocks in these sectors will perform well.

Now we know it's not a good time for property, so we expect lackluster financial results from most property stocks in the next few years to come.

By right I should have sold all my property stocks by now but I didn't. I didn't execute my initial investment plan well... Why?

Out of 3 pure property stocks I hold, I opine that Matrix and Huayang can at least sustain its current earning level for the next 2 years. So I decided to hold and see, since they are also generous in rewarding shareholders.

For Tambun, its growth phase might be over and I have decided earlier to sell all of its shares in stages.

However, I was quite surprise to see better-than-expected demand from its recent launch, which include the new apartment in Pearl City, Avenue Garden. I see almost 70% of Tower 1 have stickers on them and now Tower 2 are open for sale.

They even withdrew some earlier promotion because sales is better than expected.

Its International school and shopping mall are on track to be completed this year, and should be able to collect some rental income.

Besides, it has also just purchased a piece of land in prime location in Bukit Mertajam.

It is rumoured that EcoWorld will launch its project Eco Meadows in Simpang Ampat within this year with 3-storey terrace starting from RM850k. This makes Pearl City's property looks cheaper.

It is also rumoured that Bank Negara may lower interest rate in the second half this year. Will it breathe some life into property sector?

Tambun might have an "outside chance" to sustain its RM100mil annual profit this year.

After that it is hard to predict. It can be better or poorer.

Who knows it will later renegotiate the previously cancelled huge land deal next to its Pearl City and successfully acquire it?

I'm still thinking whether to keep or sell my remaining Tambun shares. Should I sell for other growth stock or keep for good dividend?

Tambun should give at least total 9.5sen dividend for its FY14, and it is still a good yield above 5% now.

Perhaps I have fallen in love with this stock, which I know is one of the deadliest mistake investors should avoid.

Tambun is the one and only stock which occupied my core portfolio before. It almost single-handedly reverse my previous loss in stock market.

However, if it gives negative surprises repeatedly like Zhulian, I will not hesitate to sell all even though its dividend yield is still attractive.


  1. Agree with ur strategy as we still relatively young and have the time to wait for the growing companies to grow. However, some investors like mercury (sorry to quote u) whose philosophy I agree too. His reason is dividend are realised profit which goes into our acc not like paper gain which can vanished in the event of big sell down as happened last year. By receiving the dividend we can reinvest & indirectly our investment grow as well. I think its best to find a banlance where a growth stock that have good dividend pay out policy. By the way what's ur opinion on pohuat? Would like to research more on it.
    Good write up by the way :)

    1. Thanks. I admire "mercury"'s achievement too. It's best to find stocks with both growth & good dividends.

      I don't study Pohuat in detail. As long as US economy is improving, it should do better like Latitud. Valuation almost same with peers I guess.

  2. Hi,

    what you think about this two shares - bjcorp, ibhd and amprop?
    do you think these 3 shares will have future growth prospective especially ibhd? thanks and it is a good article from you ^^

    1. Thanks.

      Sorry I'm not going to study those stocks in detail. I don't even have time & energy to study stocks in my watchlist...

      As I use only PE ratio, personally I don't like BJCorp as it's too diversified and its profit is hard to predict. But this doesn't mean that it's not good.

      Amprop seems to venture overseas but I'm not familiar with it. I think IBhd has potential in long term. Just worry about the take-up rate of its new launch.