We analyse fundamentals of dividend yield stocks ahead of reversing yield
compression. On this basis, we like SingTel and SATS. Negatively impacted stocks
are SIA Eng and StarHub.
• High yielding stocks have done well. Since the Global Financial Crisis (GFC) in 2008,
an abnormally low interest rate environment has prevailed. This resulted in
outperformance of high dividend yield stocks as yield compression set in. On a ytd basis,
components of our basket of yield stocks have generally outperformed the FSSTI.
• Beware of reversal of yield compression. Given expectations of rising US interest
rates later this year, we analyse the potential impact on yield stocks and highlight
downside risks, particularly for stocks which are trading significantly lower than the
historical spread over risk-free rates. On this basis, StarHub and ComfortDelGro may
have the most downside risks, but we note that the latter could raise its payout
significantly and the market is also pricing in the possibility of a special dividend in FY16.
Conversely, stocks that are trading above mean spread over risk-free rates would benefit
from mean reversion and these include SingTel, SATS and SPH.
• Slicing and dicing the high yielders. Other than mean reversion to historical spreads,
we also analyse dividend payout, price/cashflow and other financial matrix to see if there
is sustainability of dividends or upside to payout. Our analysis indicates SingTel and
SATS to be the most compelling.
• Yield an important component of total market returns. Despite concerns over the
potential reversal of yield compression, we believe selected yield stocks will remain
favoured. This is because our study shows high dividend yield stocks accounted for about
18% of total market returns over the last decade in Singapore. Hence, even with an
expected rise in interest rates, we think investors should still maintain selected high
dividend stocks in their portfolio for steady returns. Also, yield stocks with solid growth
prospects will also be better positioned to mitigate rising rates.
Risk adverse investors
could opt for dividend stocks that are less correlated with interest rates
. This includes
SingTel and SATS, which are our top dividend yield picks
. Another low beta but safe
alternative is SPH, but our entry level is S$4.00
. (Read Report)
Source : UOB KayHian Research
Labels: Equity Strategy, SATS, Singtel, SPH