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1 Big Problem with Singtel’s Dividend

1 Big Problem with Singtel’s Dividend

Singapore investors love their dividends and that’s fair enough given the zero dividend tax in the city state.

One of the more familiar names in the dividend stock world here is the leading telco Singapore Telecommunications Ltd (SGX: Z74).

It’s better known as Singtel. As a telco provider, it has pretty predictable cash flows and pays those out as dividends to shareholders.

Singtel shares regularly provide investors with a dividend yield of 3-5%.

The company recently reported its FY2023 earnings but I feel the numbers just continue to highlight one glaring issue with the company’s dividend.

Singtel’s high dividend payout ratio

The main problem with Singtel’s dividend is that it pays out too much of its profits as dividends.

Why is that an issue? Well, if there’s even a small drop in profits then the dividend is likely to get cut. That’s less than ideal for dividend investors.

Even with its latest announced ordinary dividend for FY2023, Singtel is paying out 80% of its underlying profit as a dividend.

Back in FY2019, Singtel paid out 101% of its underlying profits as dividends! So, essentially, it paid out more than it earned (see below).

Source: Singtel FY2023 earnings presentation

That’s not exactly a recipe for sustainability and so it proved as it then proceeded to cut its dividend per share (DPS) to a FY2021 low of 7.5 Singapore cents.

Focus on the long-term growth of the dividend

When we invest for dividends, we shouldn’t forget that we should be focused on the long-term sustainability of that dividend.

It’s boring, I know. We want fast and strong growth in the dividend but that growth has to be sustainable.

So, what’s a sustainable dividend payout ratio you say? Generally, it’s between 40-60%.

That’s because even if there’s a slight drop in profits, the company isn’t going to struggle to pay the dividend.

Of course, you may have to deal with a lower dividend yield but over time, the benefits of investing for long-term stability will win out.

Just look at the three-, five-, and 10-year performance charts for Singtel shares – it’s not pretty.

And although the dividend is just one part of the story over that period, it has highlighted how crucial a stable dividend really is for long-term investors.