THE InsiderAsia Income portfolio performed quite well in the first month after inception. Total portfolio value was up 0.9% amid weakened sentiment for the broader market. By comparison, the benchmark index, FBM KLCI, fell 1.1% in June.

This is what we hoped for, when we started the portfolio. By selecting stocks that have track records of paying above market average dividends — and most importantly, which are expected to be sustainable for the next 2-3 years, at least  — we expect the promise of steady income stream will also preserve capital in a falling market.

To recap, we have chosen companies with strong balance sheets, most are in net cash positions, whose businesses are expected to be fairly resilient with steady cashflow generation as well as a track record of good governance — even if their prospects for high growth are modest.

To be sure, the list may seem “boring” and yield stocks are always less “sexy” than growth stocks. It is worth noting though, there have been many studies on stock market returns through the years and the evidence is overwhelming — dividends account for the larger portion of investors’ total returns (capital gains plus dividend income) over time.

As mentioned previously, we view this Income portfolio as a long-term holding, with fairly infrequent trading. We made no change to our portfolio last month. Sometimes, less is more.

We have, however, added to our holdings in MSM and Magnum — bought with dividends received from the two companies. Their stocks went ex-entitlement for dividends of 14 sen and 5 sen per share, respectively, in June.

Our methodology is to reinvest all dividend income into additional shares. We subscribe to the miracles of compounding — to earn income on income earned. This has proven to be a lucrative strategy for patient investors, taking full advantage of time, particularly if dividends are also growing in line with company earnings.

Perstima has fixed the entitlement date for its final dividend of 20 sen per share for August 4. Its shares have fared well over the period under review, gaining 6.5%. Yields remain attractive at 7.4%, based on total dividends of 35 sen per share for FYMar2015 and share price of RM4.72.

As a reminder, shares for Kim Loong and Crescendo will trade ex-entitlement for dividends on August 10. The former has surprised with an additional 10 sen per share special dividends, on top of the previously declared final dividend of 6 sen per share for FYJan2015 while Crescendo is paying 5 sen per share.

Next up, Bursa Malaysia is set to release its 1H2015 earnings results mid-July. In the past 2 years, it has rewarded shareholders with special dividends at this time – and could continue to do so this year. The company is sitting on cash totalling some RM271 million with another RM31 million in short-term investment securities. We estimate excess cash of approximately RM100 million, after taking into account working capital and clearing guarantee requirements.

In fact, we look forward to more dividend announcements as companies enter the 2Q15 reporting season. Based on previous track records, Carlsberg, Apollo, Star and YTLE typically declare dividends in the month of August.

Star Media Group

Despite earnings contraction over the last two years and an unexciting outlook for the print media, Star continues to generate an average free cash flow of RM176 million (24 sen per share) for 2010-2014. And the company is sitting on net cash of RM367 million (equivalent to 50 sen per share).

As such, we believe its attractive dividends are sustainable for the foreseeable future. Based on total dividends of 18 sen per share in 2014, the stock offers an attractive yield of 7.2% — one of the highest on the local bourse.

The Star is the most widely read English language newspaper in the country. Although it has diversified into radio, television and event management, the print and digital segment remains its main revenue generator, contributing 70% of revenue and 106% of pre-tax profit in 2014.

For 1Q15, revenue rose 3% y-y to RM217.4 million while net profit jumped 63% to RM26.5 million, primarily due to the absence of one-off cost rationalisation expenses incurred in 1Q14.

YTL E-solutions

We expect YTLE’s earnings to be resilient. The company owns 60% of the rights to 30MHz of the 2.3GHz WiMAX spectrum, which it leases to YTL Communications, operator of the “Yes” mobile and Internet services. Under the agreement with the latter, it will receive a minimum RM75 million annually or 15% of the WiMAX services revenue, whichever is higher.

Dividends were raised to 4 sen per share in FYJune14, up from 2 sen in FY11-FY13. This translates into a higher-than-market average net yield of 7.5%. We believe this level of dividends is sustainable — in fact, we would not be surprised if the company raises its payout further.

It has steady cashflow from operations and a strong balance sheet. YTLE has built up quite a cash pile, from RM185.9 million in FY11 to RM208.1 million in 3QFY15. This is equivalent to 15.5 sen per share, or some 29% of its current market capitalization.

The company is 74.1% owned by YTL Corp, which also controls YTL Communications.

This article first appeared in The Edge Malaysia Weekly, on July 6 - 12, 2015.

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