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How to Make Big Profit from Dividend Stocks

Dividend stock is the term for a stock which the company pays dividends in large amount, say more than half of its net profit in a given year, while on the other hand, the price of the stock is not too high so that its dividend yield are greater than other stocks in general. Example? Bank BJB (BJBR). Since the year 2007 to 2013, BJBR always pay dividends by an average of 65% of its net income each year. For the book of 2013, the dividend was Rp78 per share. With the price of Rp965 per share before the cum date, then the dividend yield of BJBR was 965 / 78 = 0.081, or 8.1%. This figure is quite large when compared with yield of blue chip stocks, which only 2 – 4% in average.

So if you find a stock/company who distribute 100% of its annual net profit, but on the other hand its yield was little because the share price is too high, then you know that the stock can not be categorized as a stock dividend. Example? Unilever Indonesia (UNVR). Conversely, if there is any company that pay dividend in small amounts, say only 20% of its profits, but its yield remains high, then it is also not a dividend stock. However, I have never find such stocks (small dividend payout ratio, but its yield remains high). If there was a stock with such condition, then it means that the valuation is very very low and I will be in the forefront to buy it.

Another term to refer a 'dividend stock' is a stock that pays dividend with a yield of more than the rate of bank deposit in Indonesia, ie above 4 – 5%. So if there is any stock with dividend yield of 8.1% like BJBR above, then you can simply refer BJBR as a dividend stock.

Some investors might like dividend stocks because, just imagine: You only have to buy a stock before the cum date, and soon you will get a sum of money which is transferred directly to your account. In addition, in contrast to the value of capital gains that can go up and down depending on changes in the price of shares that you hold (you may also suffer a loss, if the price drops), then the value of dividends is fixed, that you will certainly receive the money.

However, if you look at the way of Warren Buffett in investing, he does not like stocks that pay dividends that are too big. Because for the company, instead of 'wasting' its profits in the form of dividends, it would be better if the profits are reinvested. When BJBR paid Rp757 billion (equal to US$ 70 million) of dividends in April 2014, then that’s it, only that much of money that are received by all shareholders of the company. But if the money was reinvested, say to open a new branch office, then the branch office may generate additional net income for the company in the next year, so in the end it will be more beneficial for the shareholders.

That’s why, since Buffett acquired Berkshire Hathaway acquired in the '60s, the company almost never pay dividends at all even until today, even though the companies that exist in Berkshire’s portfolio regularly paying annual dividends in cash (but Buffett uses the cash to buy more shares). And the result, the net asset value or book value of Berkshire has been grow much faster than the average growth of the US stock market, with a margin of nearly 10% annually. We could say that Buffett almost never take a dime from his investment results, because any profits generated are always reinvested. For daily needs, Buffett only take his salary as Berkshire’s CEO at US$ 100,000 per annum, of which the salary is considered as one of the company's expense.

As well as Berkshire, in the Indonesia Stock Market, there are also some companies that only pay dividends in small portion of its annual profits, or pay no dividends at all, even though they keep making substantial profits each year. And the result? The rate of real growth (growth in net assets/equity/capital) of the company was way higher than the average of its sector. Example? Bank BTPN (BTPN). At the end of 2010, BTPN had an equity value of Rp4.2 trillion. And by the end of third quarter of 2014, the equity had been grown to become Rp11.4 trillion, or grew nearly tripled in less than four years!

While BJBR as a 'generous’ company, at the same time period only posted a rise in net asset value from Rp5.0 trillion to Rp6.7 trillion. Based on this example, the stock that ‘stingy of dividend’, of course, as long as the company operates normally and capable of generating a large profit (reflected on its big ROE), is a better option for investment especially for the long term, because the company offers the growth rate of net asset that is higher than the ‘generous’ ones. And of course, if a company successfully make a significant growth in its net asset value, then the price of its shares in the market would rise by itself.

However, Buffett still buys stocks that pay dividends in a reasonable amount, which is about 30 - 40% of its annual net profit, because he could use the cash to buy more shares when the market is down, or buy other undervalue stocks that he found. As an investor that does not have a sell button in his trading software, the dividend is important because Buffett can not obtain cash from the sale of shares, because he is almost never sell his shares at all.

Therefore, if you want to copy the investment method of our master, I advise you not to buy dividend stocks such as BJBR earlier, but also do not take stocks that do not pay dividends at all (like BTPN), but: Buy stocks/companies that pay dividends in a reasonable amount each year. One of the main holding of Berkshire Hathaway, the Coca-Cola Company, it regularly distribute a dividend of 50 – 60% of its net profit each year (for a consumer company like Coca-Cola, the amount of 60% is still quite reasonable and not too big. Yo may compare it with UNVR, that distribute 100% of its profits as dividends), while the rest reinvested. And because the net income itself continues to rise for more than 50 years in a row, then the value of the dividends that Berkshire received from Coca-Cola also continued to rise from year to year.

But the discussion above does not answer the question: How can we make significant profits from dividend stocks?

Based on experience, dividend stocks have some of the following characteristics. First, the price (of the stock) is often rise way ahead of its cum date, or when the value of the dividend has been announced, ie, after the company held its annual shareholders meeting. If the value of the dividend is large, say Rp100 while the stock price itself only Rp1,000 per share (so that its yield was 10%), then the stocik will usually go up at least 10% when the dividend is declared. If the company is regularly paid large dividends in previous years, then the rise is often already happened a few weeks before the announcement, let say in January or February (because the announcement about the distribution of dividends are usually released in March to April). Besides BJBR, you can take a look at the movement of Indo Tambangraya Megah (ITMG), which the dividends are also large, and the stock is usually rises a lot at the beginning of the year.

So in this case, if you can identify which stocks that would distribute large dividends (or large dividend yield), and when the company will hold the AGM to determine the amount of the dividend (usually between March and April), then you can buy the stock today and then hold it until the cum date. Unless something bad happens, say if the Jakarta Composite Index (JCI) is down, then you’ll have a great opportunity to make a greater gain than the value of dividend itself. Use the example of BJBR (which has always been known for its generous dividends), the stock rose from 915 in early 2014 to briefly topped 1,100 in March (when the dividend was announced), or increased Rp185 per share, whereas the value of the dividend itself was only Rp78 per share (and remember, it was before dividend tax).

That was first. Second, after the cum date, a stock will usually go down (not necessarily on the very next day, but eventually it will go down) with value of the drop that is larger than the value of the dividend itself. Examples? Adira Dinamika Multifinance (ADMF). On 31 October, ADMF paid (cum) dividend of Rp2,295 per share (totaling Rp2,700, but some of them have been paid in advance). And the stock? Dropped from Rp11,125 per share on the cum date, to currently 7,450, or down 3,675 points! So, instead of buying shares for the purpose of obtaining dividends, it would be better you apply the above strategy: Buy a dividend stock long before the dividends are declared/paid, then sell it right at the cum date. By this way, you will not receive dividends, but you will get a capital gain that is larger than the dividend itself.

If you read the above once more, it is quite clear that we can take advantage from the extreme fluctuations that may occur in the stock price when the company is about to pay dividends, to make significant profits. However, for certain large institutional investors, they can not buy and sell their stocks all the time, so they can not apply the same strategy, so that the fluctuations in stock prices because of the dividend is more detrimental than beneficial. To deal with this problem, some companies did not distribute their annual dividends at once but gradually, say two or three times a year, so that the value of the dividend itself become small (because it has been divided into two or three). For example, United Tractors (UNTR). For fiscal year 2013, the company distributed dividend of Rp515 per share in total, so the yield was 2.5% if we use the share price of Rp20,000, or 'eye-catching' enough. If the dividends are paid at once, then before the cum date, UNTR might rise by more than 2.5%, and vice versa, after the cum date, UNTR also might fall by more than 2.5%. However, because the management paid the dividend in two stages, ie Rp340 in May and Rp195 in September 2014, then the yield looked much smaller. As a result, the dividend had almost no impact on the company's stock price, either when the dividend is announced or after the cum date (in May and September).

Okay, I understand now. Then, Mr. Teguh, do you have data of stocks that could be categorized as ‘dividend stocks’? Based on IDX statistics per second quarter of 2014, there were 165 companies from 480 companies in the Stock Exchange, which pays cash dividends for the fiscal year 2013. But to check which stocks that has high dividend yield, then you may have to check it manually. However, based on my own research, in the IDX, there only a few stocks that can be categorized as dividend stocks, some of them are already discussed above. The others are Bank Jatim (BJTM), and most of coal stocks/companies.

Well, since it is already December, then you've got about a month to begin selecting dividend stocks before they began to fly at the beginning of next year, of course, if its yields are at least equal to the dividend of last year (so you have to take a look at the position of the company's profit in 2014, whether up or down compared to 2013). But if you are prefer to hold stocks for long term, then you should try the tips of Our Grandpa: Choose stocks that pay dividends in a reasonable amount, ie 30 – 50% of its net profits/income, and the value of the dividend itself continue to go up from year to year, in line with the increase in net profit of the company. Examples? Well, since we’ve had several examples in this article, so for this time please find it yourself.

1 comment:

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