How I Pick Dividend Stocks in Bursa Malaysia

When I was young, I love to play duckling fishing whenever my parents brought me to the fun fair. I love the anticipating feeling when we have no idea what rewards the duckling will give. It feels awesome when we get to pick the duckling with a number that gives great rewards, and quite disappointing when it does not have any rewards.

This is much related to our stock market now. Imagine that the small pool is Bursa Malaysia, and the ducklings are the stocks. The only difference between stock investing and duckling fishing is, we can study and analyze the probability that the duck will give us any reward at the end of the day.

Today I would like to share to you on how do I pick a stock to invest for dividends. By default, I always aim for the stocks which give at least 5% dividends. If it is less than 5%, I would rather put my money in a fixed deposit account during promotion, which guaranteed to return us at least 4% of interest.

Yet, only blindly aim for dividend yield is not a smart way of dividend investing. There are many companies that give lucrative dividends to lure innocent investors. Hence I compiled my 5 criteria which I used to determine if a stock is worth to invest for dividends.

p/s: I apply the same evaluations on blue-chip stocks and REITs.

1. Increasing Dividends Over Years

A good dividend stock should give us consistent dividends, and better, increasing dividends! That's the ideal case. However, I still unable to find a stock that really gives 10 years continuous increasing dividends. So I would also consider calculating the total DPU growth over 5 years or 10 years. This will see if the company has the potential of distributing dividends continuously for at least 5 more years.

2. Low Debts & Borrowings

Increasing dividends from a company does not mean the company is financially healthy. We need to flip through their balance sheet and check for their current borrowings behind all these lucrative earning and dividend figures.

A company with huge debts means they have a higher chance to go bankrupt, compared to a company with low or no debts. Hence we need to make sure that the stock we invest in should not have too many debts. I use the gearing ratio as my benchmark to measure if a company has high debts or not.


Gearing ratio is a financial ratio which measures the proportion of total shareholders' equity and all borrowings. Higher gearing ratio means that the company has a higher probability to go bankrupt. My benchmark for the gearing ratio of a company is less than 35%.

3. Reasonable Dividend Payout Ratio

Besides increasing dividends and low debts, the dividend payout ratio is something we should know as well when choosing a dividend stock. This ratio will show if the dividend paid to shareholders is lower than the net profits they earned.

If a company gives increasing dividends over the years, but the net income is less than the total dividend paid, the ratio will be more than 1. Basically, we should not consider a company that issues dividends more than their profits. It is a sign of holding onto shareholders interest with dividends by taking out from their own cash reserves or even worse, their loans.

4. Large Market Capitalization

In my investment portfolio, I love to choose stocks with large market caps. They usually have high liquidity, which allows me to sell my stocks in a few minutes easily without waiting for buyers to offer a price.

Some investors may not agree with this, because smaller companies will have a higher potential to grow in both capital gain and dividends. However, this requires thorough research on their past years' figures and management to see if they are growing over time and suitable to invest in.

My way of investing is not putting too much time studying a company background. It will consume even more time when we want to diversify our investments. As long as a company is still earning incomes and pay steady dividends to its shareholders, I will invest in it.

5. Low Price-to-Earning Ratio

Source: corporatefinanceinstitute.com

When a stock met all 4 criteria from above, I will have to check if I am overpaying for a good stock. Even though I am a long term investor, I prefer not to buy an overvalued stock at a high price. This will cause me to have either a steady or lower return in the long term.

Price-to-Earning Ratio or P/E is the most common ratio in investing which we can evaluate stock if it is undervalued or overvalued. Any stock with P/E which less than 15, is a good bargain for me.

Verdict

These are all my evaluations on a stock before I decide to invest in a company or REIT. Nonetheless, I advise you to read more about how to pick a stock to invest and then choose the best criteria that suit your appetite in investment. If you want at least a 15% return per year, then my criteria will not suit you in picking a potential stock.

What criteria do you check on when selecting a stock to invest in? Share with me in the comment below. :)