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Yield plays less popular this year, say analysts

As market turns bullish, focus will be on riskier, growth-oriented stocks

QUALITY dividend stock plays were all the rage last year but a similar sparkling performance could be much harder to achieve this year.

As the market turns bullish, investors could be tempted to try their luck with riskier, growth-oriented plays rather than stick with strong dividend-yielding blue chips in the months ahead, analysts said.

A recent report by the Singapore Exchange showed that quality dividend-paying companies have soared in the past year as investors sought the safety of blue-chip stocks.

StarHub, for instance, rose more than 40 per cent over the past year. Its indicated dividend yield was 4.89 per cent, the highest among the component stocks of the Straits Times Index (STI).

Likewise, SIA Engineering, which pays out 4.53 per cent in dividends, also shot up close to 30 per cent over the last year.

SingTel, with a 4.48 per cent dividend yield, rose more than 13 per cent.

But another bull run on such dividend-yielding stocks could be hard to achieve this year, said Mr Kevin Scully, executive chairman of boutique finance house NRA Capital.

For one thing, the prices of these companies have run up very quickly, compressing the dividend yields.

In other words, if an investor were to buy now at current prices, the yields will not look as attractive as they did last year, when prices were much lower.

"I think investors chasing yield will want to look at the next tier of companies, the smaller companies such as Telechoice or Straco, which still offer 5 per cent to 7 per cent yields," Mr Scully said.

Another reason blue-chip companies may not do as well this year is simply because the market has turned bullish, said Fundsupermart general manager Wong Sui Jau.

Investors could be in search of capital gains instead of dividends and switch to smaller firms for growth, he said.

The FTSE ST Mid Cap and FTSE ST Small Cap indexes, which measure the performances of small and medium-sized listed firms, bear this out. The STI has risen 3.22 per cent since the start of the year, but the FTSE ST Mid Cap has climbed 14.1 per cent. Similarly, the FTSE ST Small Cap has gone up by 8.5 per cent, beating the STI.

Said Mr Wong: "Given valuations, growth stocks are more attractive now.

"But we still see people move money into dividend plays, which means the search for yield story is not over just yet."

This could be simply because interest rates are still at rock bottom. And whenever rates are low, the hunt for yield will be present, said Sias Research chief executive Roger Tan.

He said that blue-chip yields are "a lot less attractive than before" but that does not mean yield should be discounted.

"The yield play will be ever- present and is a good way to hedge your bets against the market," he said.

For investors keen on yields, he suggested looking at companies which commit to paying a fixed yield rather than a percentage of their profits.

"A company that offers to pay say 1 per cent in yield every quarter is much better than a firm which says it will pay 20 per cent of its profits in yield," he notes.

That is because the former is confident that he can pay that fixed yield, while the latter is just committing to pay a portion of its profits, which can go up or down depending on business conditions.

"At the end of the day, it's best to go back to fundamentals and understand the underlying business before committing to either yields or growth," he said.

aaronl@sph.com.sg

This story first appeared in The Straits Times on March 4, 2013

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