Seeking refuge in dividend stocks, aye or nay?

Speaking with StarBizWeek, MIDF Research head Imran Yassin Md Yusof agrees that dividend yields in the local stock market look more attractive, following the recent selldown in equities.

IN times of a market meltdown where capital appreciation is highly uncertain, dividend stocks provide refuge to investors wanting to minimise risk.

In fact, some of these stocks turn extra enticing amid a selldown, as their dividend yields increase on the back of lower share prices.

However, with fears of a recession mounting and the risk of corporate earnings potentially taking a hit, not many companies would be able to offer a sustainable dividend payout.

Companies may decide to hold back on dividends as they conserve cash in anticipation of a more challenging operating environment ahead.

The question is, should investors start buying more dividend stocks?

Also, would listed companies be able to provide better dividend yields, going forward?

Speaking with StarBizWeek, MIDF Research head Imran Yassin Md Yusof agrees that dividend yields in the local stock market look more attractive, following the recent selldown in equities.

Meanwhile, fund manager Thomas Yong says that investors with lower risk appetite and looking for regular income will consider investing in dividend stocks, especially during periods of heightened market volatility. Yong, who is the CEO of Fortress Capital Asset Management, believes the market will remain volatile

However, he opines that it is not yet the right time to switch wholly to dividend stocks.

“This is as Malaysia’s economy is expected to perform better vis-à-vis last year and advanced economies.

“Besides, corporate earnings continue to look robust.

“Hence, it is a matter of valuation more than anything else.

“With this in mind, we believe that the market will likely recover in the coming month,” he says.

Imran, however, believes that some investors may want to increase their allocation of dividend stocks in their portfolio in order to limit the downside risk.

Meanwhile, fund manager Thomas Yong says that investors with lower risk appetite and looking for regular income will consider investing in dividend stocks, especially during periods of heightened market volatility.

Yong, who is the CEO of Fortress Capital Asset Management, believes the market will remain volatile due to uncertainties of inflationary pressure and developed countries’ monetary tightening response.

“During which, dividend stocks with defensive earnings will offer less risk to investors.

“We suggest that investors look out for companies with good track records on dividend payouts, and earnings not or less negatively affected by interest rate hikes.

“Companies with less gearing or smaller interest rate-sensitive liabilities will be less affected by monetary tightening,” he says.

Nevertheless, Yong cautions that most companies will still cut back on dividends, if a recession hits.

Fears of a recession has intensified in recent weeks as central banks across the world focus on fighting high inflation with higher interest rates.

Several banks on Wall Street raised their odds of a recession this week.

These include Citigroup, which is forecasting a near 50% probability of a global recession.

Goldman Sachs, on the other hand, says the probability of a downturn is “higher and more front-loaded” than it was previously.

The investment bank has raised the chances of a recession in the United States from 15% to 30% over the next year.

Such fears of the macroeconomic outlook have been hammering global stocks. The MSCI World Index, which captures large and mid-cap stocks in 23 developed markets, has declined by 21.3% this year up till June 23.

Malaysia’s benchmark index, the FBM KLCI, has also fallen in the same period, albeit at a lower rate of 8.7%.

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Despite the increased talks of a potential recession globally, MIDF Research’s Imran thinks that the risk of Malaysia falling into recession is very low at the moment.

He also sees no reason for any recession fear to exist among investors in Malaysia. “Any recession fear is more towards the advanced market.

“Of course, Malaysia will be impacted, but we believe that it is limited at the moment given the recovery of the economy and high commodity prices,” he says.

Hence, Imran is sanguine that companies will be able to maintain their payout ratios.

“Dividend payout will be tied to earnings, and as mentioned, corporate earnings continue to look robust,” he adds.

In the past 12 months, despite the economy being embroiled in various challenges, companies in different sectors have recorded attractive dividend yields.

According to data compiled by EquitiesTracker (see table), glove makers Hartalega Holdings Bhd and Kossan Rubber Industries Bhd topped the list of dividend stocks, based on the trailing 12-month dividend yield.

Hartalega has a trailing dividend yield of 19.53%, while Kossan posted a dividend yield of 18.18%.

However, it is worth noting that the glove makers’ high dividend yield was due to their super-normal profits following the pandemic, although such profits are not sustainable and are already normalising.

Next to Hartalega and Kossan is Innoprise Plantations Bhd, with a dividend yield of 15.94%.

Innoprise, which benefited from the high crude palm oil prices, witnessed its net profit for the full-year ended Dec 31, 2021 increasing by over two-fold to RM87.07mil from RM36.38mil a year earlier.

Looking ahead, investors eyeing good dividend stocks should consider companies with improving and stable earnings prospects, especially those companies with recurring income.

Going into the second half of 2022, both Imran and Fortress Capital’s Yong recommend banking stocks for investors looking for good dividend yields.

Describing banking stock dividends as “attractive”, Yong says the banking sector will benefit from an early interest rate hike cycle.

“Investors with lower risk appetite may also consider some telecommunications and utility stocks with defensive earnings,” according to him.

Imran says banks such as Malayan Banking Bhd (Maybank) and Affin Bank Bhd are “worth looking at”, although he adds that these are not strictly dividend stocks.

“Banks provide steady dividends and there may be an upside potential given that the economy is recovering,” he says.

MIDF Research has a “buy” call on Maybank and Affin, with target prices of RM9.52 and RM2.53 respectively.

Another sector worth considering, according to Imran, is real estate investment trust (REIT). “Based on our expectation, Al-Aqar REIT has the highest dividend yield.

“In terms of other stocks with good dividend yields, we also like Petronas Gas Bhd (PetGas) and Pharmaniaga Bhd,” he says.

MIDF Research has a target price of RM1.42 on Al-Aqar REIT.

As for PetGas and Pharmaniaga, the target prices are RM17.90 and 91 sen, respectively.