Why blue chips that pay dividends are a good catch

According to Wall Street historical data, the total stock market returns averaged nearly 11% per annum from 1926 to 2006. Of this figure, a sizeable 41% is derived from dividends. In general, a good dividend yield is reflective of the company's financial well-being and healthy cash flows. In addition, the dividend payouts reduce the company's cash on hand, which inevitably forces it to be prudent in future undertakings and investment projects.

Blue chips entail a relatively lower investment risk due to the reliable and robust nature of the often reputable company. Hence, by acquiring blue chips that are accompanied by dividends, the investor can enjoy potential capital gains and recurring dividend payouts, while at the same time, have the assurance that the capital amount is reasonably well preserved.      

There are a considerable number of Singapore blue chips that reward investors with decent dividends. These include Singtel (4.8%), Keppel Corp (4.3%), ST Engineering (4.3%), CapitalMall Trust (4.5%), SIA Engineering (4.4%) & SMRT (4.2%). There are also hearsays that NOL is considering reinstating dividend payout in the light of profitable business, after a 2 year barren streak for shareholders. This Channel News Asia website provides a quick summary of companies that are currently in the cd or xd stage. http://www.channelnewsasia.com/finance/stock/dividend.htm

Upon the payout, it is typical for share prices to fall vis-a-vis the amount of payout. Theoretically, the magnitude of these 2 values ought to tally, albeit with opposite mathematical signs. In reality, it is hard to predict the actual outcome. For instance, Noble’s share prices plunged 37% the day after dividend payout of 5 cents per share. In comparison, Singtel only lose 4 cents upon xd, after paying 6.8 cents. There have also been interesting cases, such as that of SGX, where the prices defied the odds and climbed a few cents after a dividend payout of 3.75 cents per share.

Nevertheless, for long term investors, the aforementioned observations are unimportant and inconsequential, because strong fundamentals are likely to drive share prices up in the foreseeable future.