Dividend stocks — the shield during uncertainty

The dividend thematic for the equity market will remain powerful against the backdrop of risk-free rates, cash yields and funding costs


AMID the scarcity of catalysts in the current volatile market and low-interest-rate environment, investors often turn defensive to high-yielding dividend equities for steady income.

With Bank Negara Malaysia (BNM) cutting lending rates for the third time this year — a move taken to push the economy higher — it pays to have holdings in companies with resilient earnings and regular dividend payments.

According to Maybank Investment Bank Bhd (Maybank IB), against the backdrop of declining risk-free rates and related decline in cash yields and funding costs, the dividend thematic for the equity market will remain increasingly powerful especially when the earnings growth (or capital gains) outlook remains highly uncertain.

“Average FTSE Bursa Malaysia KLCI (FBM KLCI) dividend yield (around 3.5%) now exceeding the benchmark 10-year Malaysian Government Securities (MGS) yield is indicative of the relative attractiveness (or undervaluation) of equity market high-dividend- yield stocks over the alternatives of bonds and cash,” it said in a note recently.

A check on BNM’s website showed the 10-year MGS yield closed at 2.79%, spiralling downwards since its 2018 peak of above 4.2% during the 14th General Election month, according to Bloomberg data.

Hong Leong Investment Bank Bhd said the FBM KLCI’s dividend yield now stands at 4.53%, representing a spread of 2.53% to Overnight Policy Rate (OPR) and 1.68% to 10-year MGS.

It said these spread readings are rather unprecedented at >+3SD above a 10-year mean, suggesting some upside potential for divvy plays.

“Additionally, the defensive appeal of high divvy yielders should also stand out in light of the uncertainties from Covid-19.

“Some of the ‘Buy’-rated divvy yielders that we like are Astro Malaysia Holdings Bhd (9.1%), British American Tobacco (M) Bhd (8.3%), Pecca Group Bhd (7.6%), MRCB-Quill Real Estate Investment Trust (MQREIT) (7.6%), Tali- works Corp Bhd (7.4%), MBM Resources Bhd (7.0%), Pharmaniaga Bhd (6.7%), Hap Seng Industries Bhd (6.3%), Matrix Concepts Holdings Bhd (6.2%) and UEM Edgenta Bhd (5.1%),” it added.

Similarly, CGS-CIMB Research has identified high dividend-yield stocks as one of the five trading themes for 2020.

The research arm advises investors to be nimble in their investing strategy due to the constantly changing business landscape.

“We are of the opinion that investors may opt for defensive stocks that offer good dividend yields in view of the volatile market conditions and our expectation that interest rates could be cut by 50 basis points (bps) (from 3%) in 2020,” it said in a research note in February.

Indeed, BNM recently cut its OPR by 50bps to 2%, a level last seen during the global financial crisis in 2008-2009.

The move came after the central bank slashed the OPR by 25bps to 2.75% in January and another 25bps in March to 2.5%.

However, Rakuten Trade Sdn Bhd research VP Vincent Lau suggested that although dividend-yielding stocks are defensive in a liquid market, investors have to ensure it is a sustainable company.

The Malaysian Reserve looked into heavyweights in the local stock market with the highest indicated dividend yield.

A check on Bloomberg shows that blue-chip stocks have an indicated dividend yield between 0.21% and 8.53%.

Malaysia’s largest bank, Malayan Banking Bhd, is currently trading at an attractive yield of 8.53% — one of the highest among banking stocks in the region.

The banking group last year paid a total dividend of 64 sen per share after achieving a record-high net profit of RM8.2 billion.

Bloomberg data also showed that other banking groups like CIMB Group Holdings Bhd and RHB Bank Bhd also indicated high dividend yields of 7.58% and 6.64% respectively.

For Maybank IB, its dividend stock picks are those with a cash yield of more than 4% and sound dividend-relevant parameters, such as dividend frequency, payout ratio, free cashflow yield, net gearing and net debt to earnings.

Its top 10 yield picks with ‘Buy’ ratings are banking group RHB Bank and AMMB Holdings Bhd; energy company Malakoff Corp Bhd; media company Astro; highway concessionaire Litrak Trans Kota Holdings Bhd; MQREIT and YTL Hospitality REIT; auto manufacturers/distributors Bermaz Auto Bhd (BAuto) and MBM; and gaming company Berjaya Sports Toto Bhd.

“Some banks are also on the list, such as RHB and AMMB, which are both trading below book, and they have delivered rising earnings and strengthened balance sheets, with high capital levels underpinning yield expectations.

“And as expected in a dividend portfolio, REITs are key picks, with the potential to also boost earnings and yield via debt refinancing,” Maybank IB added.

The research arm said auto manufacturers/distributors also make the list, notwithstanding potential earnings drag from foreign-exchange volatility, as low price- earnings-high payout combinations make for high dividend yields, further supported by net cash balance sheets.

As for CGS-CIMB Research, the criteria for its stock selection are companies that are rated ‘Add’ under its coverage, and those that offer dividend yields that are higher than the average dividend yield for KLCI at 3.5%.

From the criteria, its top 10 dividend-yield plays are BAuto; Star Media Group; Astro; AMMB; IGB REIT; water services group Tali- works Corp Bhd; technology company UCHI Technologies Bhd; energy company Gas Malaysia Bhd; mattress maker Lee Swee Kiat Group Bhd and industrial rubber hose manufacturer Wellcall Holdings Bhd.