Dr Wealth Dividend 50

Unlock the potential of your portfolio with our list of the top 50 dividend stocks for 2024. Discover why these stocks are able to deliver steady high dividends (average dividend yield of 7.6%) and how they can fit into your investment strategy. You can download the full list below.

Our Methodology

The Dr Wealth Dividend 50 list is based on a set of screening criteria. Some may be concerned about quantitative rules, but we believe objective rules are often better than human intervention. Just like a stock index is determined quantitatively by one key rule—highest traded market cap—yet most investors will find it hard to beat even with more analyses employed. Thus, we believe in the power of developing a set of sound quantitative rules to identify stocks for us.

Our focus is on Singapore and Hong Kong stocks because these two jurisdictions do not impose dividend taxation, and management tends to distribute generous dividends.

You can watch the full explanation of the selection criteria in this video or read on for the text:

#1 High Dividend Yield: Stocks with a yield of at least 5%

Stocks are generally considered riskier than bonds, and thus, investors are likely to demand higher yields from stocks to compensate for the risks assumed. Given that in Singapore, the Singapore Government 10y Bond interest is about 3.18%, while the CPF Special Account pays out 4%, we believe that a 5% dividend payout is the minimum to satisfy most investors’ desired yield. Also, higher yields would enable a higher amount of cash flow received by investors, and lower capital requirements to enable a decent amount of cash flow for investors who rely on dividends for living expenses.

However, it is important to note that high dividend-yielding stocks, e.g., those yielding 10% and above, may present too much risk. Typically, it is not because the companies pay out high dividends, but rather because their businesses have run into trouble, and the share price has tanked, causing their dividend yield to shoot up. Dividend investing should not be based on dividend yields alone.

#2 Sustainable Dividends: Earnings Yield and Average Free Cash Flow Yield of at least 5%

Dividend distribution must be consistent to make it worthwhile. Dividend cuts or years with no dividend not only affect the cash flow for investors, but share prices are likely to be down too, creating a double whammy.

While we don’t conduct qualitative analysis to assess the sustainability of dividends (e.g., business model, moat, management skills, etc.), we use quantitative proxies to help us. One aspect is the payout ratio, whereby dividends are sustainable if they are paid out within the earnings generated by the business. If the business makes $1 and pays out $1 or less in dividends, we deem it sustainable. We use an earnings yield of at least 5%, matching the dividend yield of 5%.

However, earnings may not always be in cash and may include non-cash gains like property valuation increments. Yet, dividends are paid in cash (unless in rare cases where scrip dividends are offered). Thus, we have to measure the cash generated by the business, which should again be higher than the dividends distributed. The criterion is that the free cash flow (FCF) yield should also be at least 5%. We use a five-year average in this case because FCF is known to be more volatile than earnings and dividends, so we smooth it out through averaging.

#3 Dividend Growth: Dividend, Earnings and Free Cash Flow Growth of at least 3%

Dividend stocks are ultimately mature companies, and growth is expected to be low. This is because management deems that the business has fewer worthy opportunities to expand into, thus they have surplus cash to distribute to investors.

One of the greatest fears for dividend investors is that while the dividends are good, the share price falls more than the dividends received, resulting in an overall losing position. How do we prevent this with quantitative rules? The answer lies in growth. We don’t need high growth, but a growth rate that matches GDP growth (about 3% in Singapore and Hong Kong) is sufficient. As companies grow and become more valuable, the share price should move up in tandem. Thus, having some growth will improve the quality of the companies we select.

#4 Include the Banks!

Many dividend investors love bank stocks because they often distribute consistent and rising dividends over a long period. However, banks have unique business models and financial statements that differ significantly from other companies, making them easy to eliminate by some quantitative rules. For example, banks’ free cash flow is often negative, so we exclude banks from this criterion to include them back into the list.

#5 Buy the Biggest!

There is a tendency for smaller cap stocks to deliver higher dividend yields than bigger cap stocks. This can be understood from different perspectives. One, smaller cap stocks are deemed riskier, thus their yields have to be higher to compensate for the risk. Two, bigger cap stocks are more well-known, and more capital chases after the same handful of stocks, causing their prices to trade at a premium, and thus, the dividend yield becomes lower. Whichever reason, we would end up with a list of small caps if we rank by dividend yield. The concern is that most investors will find it psychologically hard to follow these small caps. There is no good in a screen if investors can’t execute the strategy. Thus, we added a criterion of ranking the stocks by market cap and selecting the top 50.

Top Holdings

Here are a few highlights from our Dividend 50 list (generated on 20 Jun 2024):

You will find that most of the top 10 stocks are banks. This should not come as a surprise because banks distribute good dividends and are the largest stocks in both Hong Kong and Singapore stock markets. Since we ranked by market cap, they will dominate the top holdings. However, because we equal weight the 50 stocks, ranking higher does not give them a higher weight in this case.

An important observation is that the list has no REITs, which some may wonder about since they also give out high dividends. This is due to the current high-interest rate environment, which benefits banks but is bad for REITs. Many REITs have suffered dividend declines as more money is diverted to paying financing charges. Thus, REITs are likely to fail the growth criteria.

We believe that REITs will appear in future screens when their dividends start to grow again.

Investors should also note that this is a Hong Kong-heavy Dividend 50 at this moment, with only 10 Singapore stocks shown in the table below:

There are two reasons. First, there are more than 2,000 stocks in Hong Kong, while there are only about 600 stocks in Singapore. By sheer number, one would expect a ratio of fewer Singapore stocks in the screened results. Second, Hong Kong stocks have been beaten down more than Singapore stocks over the past three years, and thus their dividend yields are generally higher. That said, the Hong Kong stocks presented here have shown dividend growth even when there are challenges in the macro environment, so we can say that these are fundamentally stronger than the others that failed the screen.

The average dividend yield for the Dividend 50 comes up to about 7.6%. However, it is likely lower since the China-domiciled companies will draw a 10% dividend tax. But we believe that the yield would still be above 7%.

We did not conduct a backtest for this, but we will forward test this portfolio and rebalance once a year!