As investors, we are always on the lookout for the next big stock.
Sometimes, that stock can be staring at us right in the face.
For example, when we first bought DBS Group (SGX: D05), it was already a blue chip stock. Yet, if you had bought it together with us the first time we bought it in 2020, a $9,670 investment would be now worth $18,295, excluding dividends.
Including dividends, you would have seen your return balloon to $22,724, or 135%.
Okay, one might argue that share prices were depressed back in 2020.
However, our portfolio also bought into DBS earlier this year. Since our purchase 4 months ago, we’ve seen a 9.2% gain on that purchase.
Some investors might prefer growth stocks – stocks that see their share price grow over time. Others might prefer income stocks – stocks that pay out a solid dividend.
However, as the example of DBS shows, it need not be one or the other.
You can enjoy the best of both worlds.
So, how do we identify stocks with potential for both capital and dividend growth?
Underlying business growth
The good way to find a great dividend stock to own is to focus on its underlying business and not its share price.
Remember that the business drives the share price, not the other way around.
You should select stocks with strong and consistent business growth over the years that you feel comfortable owning for the long term.
These businesses should ideally possess a sturdy competitive moat (to fend off competitors) and enjoy sustainable tailwinds that will allow their business to flourish.
In the case of DBS, the lender recently saw its market capitalisation surge past the S$100 billion level, being the first Singapore company to do so.
2023 saw the bank report its highest-ever net profit of S$10.3 billion, up 26% year on year.
The first quarter of 2024 (1Q 2024) saw the lender continue this momentum with yet another record-high quarterly net profit of S$2.96 billion.
Rising dividends
It’s clear from the numbers above that DBS’s business is enjoying a purple patch.
The bank benefitted not just from the higher interest rate environment but also saw its non-interest income gaining ground with fee income crossing the S$1 billion level for the first time.
With the business doing well, the blue-chip group decided to increase its dividends.
A quarterly dividend of S$0.54 per share was declared and paid out, 42% higher than the S$0.38 dished out in 1Q 2023.
The S$0.38 dividend itself was 15% higher than the S$0.33 that was paid in 1Q 2022.
This example shows that businesses tend to increase their dividends in line with their earnings.
If profits and cash flows increase, many companies will also up their dividends in tandem.
The trick is to find these stocks to own for the long haul.
Another example illustrates this point.
Sheng Siong (SGX: OV8) recently released its first half of 2024 (1H 2024) earnings which saw its net profit rise by 7% year on year to S$69.9 million.
Along with the profit increase, the supermarket operator’s interim dividend was raised from S$0.0305 to S$0.032.
Again, these are the sort of businesses you should seek.
A strong business results in a higher share price
Warren Buffett, one of the greatest investors the world has known, has this to say about investing.
“When the business does well, the stock eventually follows.”
Companies that see their earnings rise over time should be rewarded with a higher share price.
Like DBS, as its business improves, the bank’s market capitalisation has headed higher.
Why is that the case?
These companies tend to peg their dividends with their profit.
Hence, as profit grows, so will their dividends.
And if the dividend grows, the shares are usually driven up to a higher price, thus giving the company a higher market cap.
What does the above mean to investors like you and me?
If you step back and take a look at the big picture, you can enjoy capital gains from a higher share price along with increasing dividends.
In other words, a growing stream of passive income.
Get Smart: The best of both worlds
It’s possible to have the best of both worlds when investing – a rising share price coupled with higher dividends.
There is no secret formula here.
All you need to do is to buy great companies and hold them over the long term.
DBS is the first company to cross the S$100 billion threshold but other up-and-coming ones stand a chance to do so.
Ready to discover the next $100 billion stock? Our newest FREE report dives deep into five popular SGX companies that many say are the next big thing. Read our team’s findings to guide your investment strategy. Click the link here to download now.
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Disclosure: Royston Yang owns shares of DBS Group.
