KUALA LUMPUR (Sept 3): The Edge weekly in its latest edition reported that traditional dividend stocks, such as Bursa Malaysia Bhd, Dutch Lady Milk Industries Bhd and Heineken Malaysia Bhd, have been performing well over the past year.

The magazine’s Alex Chong wrote that their outperformance against the FBM KLCI could be attributed to investors seeking safety in defensive yield stocks in an uncertain market with a mixed corporate earnings outlook.

Moreover, the surprise cut in the overnight policy rate by Bank Negara Malaysia in July would have resulted in lower fixed deposit rates, indirectly increasing the appeal of quality dividend-paying stocks, said the Edge in its cover story.

It said with Malaysia’s gross domestic product growing a lethargic 4% in 2Q2016, there has been talk of another policy rate cut by year end.

It questioned that against a backdrop of slowing economic growth and potentially lower interest rates, where do investors look for yields or even better, growing dividends?

The weekly said as investors chase dividends in the big-cap space, the flight to “safe” stocks has sent their valuations up and their yields down.

It said this had raised the question as to whether these stocks can justify and sustain their premium valuations vis-à-vis investors’ high expectations of earnings growth.

The Edge said to find stocks that were more likely to have been mispriced, it turned to the small-cap space and filtered out companies with a market capitalisation of more than RM1 billion — stocks that are most likely on the radar screen of investors.

It then zoomed in on stocks with beta of less than 1.0, which indicates that their share prices exhibited less volatility against the benchmark FBM KLCI in the past two years.

The magazine said companies that generated a return on equity (ROE) of less than 4.6% — the effective bank lending rate in June — were also left out.

It said if companies are yielding an ROE that is lower than the cost of borrowings, it could mean that the underlying business models are unsustainable and are likely destroying shareholder value.

The best dividend stocks are the ones that pay growing dividends as the businesses continue to expand. Hence, we narrowed our list to those that generally have a history of consistently growing their dividends.

We also favoured companies that had a strong and cash-rich balance sheet as they could draw on their cash piles to maintain dividend payouts even if macroeconomic conditions worsened. The list is ranked by market capitalisation.

For the full story and the list of small caps with growing dividends, get a copy of the Edge for the week of Sept 5 – Sept 11 available at newsstands now.

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