When The Hour Glass (SGX: AGS) declared a reduction in its final dividend from S$0.06 to S$0.04, I anticipated a significant drop in its share price.
To my surprise, and frankly, without complaint given my vested interest, that plunge never materialized.
This intriguing development prompted me to reflect on the situation.
Click the image below to read my latest article on The Smart Investor, where I explore this unexpected market behaviour and share my insights.
Building on insights from article, I want to delve deeper into two key takeaways from this experience.
Investment before dividend
During a workshop in my previous life as an educator, the speaker reminded us that there are two words in the phrase “engaged learning”.
She shared that a common mistake, especially for new teachers, is to focus too much on the first word when designing their lessons.
Often, you might observe a fun-filled classroom with plenty of engagement, yet little actual learning occurs by the end of the class.
Similarly for dividend investing, we tend to focus on the dividends – what’s the yield? is it increasing?
However, that’s putting the cart in front of the horse.
What’s more important is really to focus on the investing. That is to spend more time to understand the business fundamentals and assessing their future potential.
This would naturally lead to greater returns on our investments — be it through dividends or capital appreciation.
Diversification Stabilises Dividend Income
We should never assume a company will always maintain or increase its dividends, even those with excellent track records.
Often, this isn’t due to poor management, but rather the nature of the business itself.
What do I mean by that?
The dividends we receive come from the actual cash flow of real-world businesses. And if you haven’t realised it by now, the real world is messy and uncertain.
Despite the best intentions of key personnel behind strong businesses, there will be times when situations are simply beyond their control. Think about situations such as the cut in bank dividends due to MAS restrictions during the COVID-19 pandemic.
Of course, such instances should be rare; these are risks good companies are expected to manage, which is why they earn their strong track records.
The crucial takeaway here is that unexpected events happen, and it’s our sole responsibility to ensure our total dividend income doesn’t fluctuate too wildly.
That’s precisely where diversification comes into play. For example, the recent cut in The Hour Glass’s final dividend impacted my total dividends by less than a percent, a direct benefit of having a diversified portfolio.
Finally, if you rely only on dividends for your daily expenses, it’s crucial to build in a buffer.
As a prudent guideline, you might aim for your annual dividends to be at least 1.5 times higher than your average expenses.
For those seeking an even greater margin of safety, targeting 2 times your expenses can provide significant resilience against unexpected market events or dividend cuts.
Alternatively, maintaining a substantial cash buffer (e.g., 6-12 months of expenses) can also help you ride through any unexpected dips.
In essence, the unexpected resilience from The Hour Glass’s share price highlights two critical lessons: dividend investing is about prioritising a company’s fundamentals over just its yield, and diversification is essential for navigating the market’s inherent messiness.
Combined with financial buffers, you can ensure your dividend income remains resilient and provides the security you need, no matter what surprises the real world throws your way.
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