The Defensive Nature of Dividend Investing: A Strategy for Uncertain Times

Dividend investing can be a powerful tool for generating passive income and building long-term wealth. In our previous article, we explored how dividend investing can be an effective strategy during inflationary times. We also highlighted how our Phillip Managed Account for Retirement (PMART) Dividend Enhanced and Phillip Managed Account (PMA) Dividend Enhanced can capitalise on specific sectors that we are targeting in 2023.

Benefits of Dividend Investing

We reiterate our stance that investing in certain sectors such as banks, selected reopening sectors such as consumer, property, and REITs, and utilities can be beneficial for investors. Banks are a key indicator of economic health, while consumer, property, and REITs are set to benefit from ongoing economic recovery. Utilities are a safe haven for investors during market volatility as they provide essential services and have stable business models. These sectors also generate consistent cash flows, which can be used to pay dividends to shareholders.

Our PMART Dividend Enhanced and PMA Dividend Enhanced is an income-driven portfolio focused on high dividend-yielding equities. We apply the Dog of the Dow approach, screen and select top market cap stocks to minimise risk and ensure consistent performance. The portfolio is an equal weighting portfolio which reduces concentration risk and provides similar exposure to all clients, both initially and after rebalancing. We offer both conventional and Shariah investment options to cater to the diverse needs of our investors.

Our portfolio invests in high-quality companies that offer a defensive earnings profile and promising dividend prospects and yield. We believe these companies will benefit from the recovery in tourism and rising rates.

List of companies in PMART Dividend Enhanced and PMA Dividend Enhanced (Conventional)

Source: PCM, Bloomberg, sorted by 12mth Blended Forward Yield, as of 28 February 2023

Breakdown by Sector (Conventional):

Source: PCM

Performance Chart (Conventional):

Source: PCM

Performance Snapshot (Conventional):

Source: PCM (*Since Inception 31/3/2020)

List of companies in PMART Dividend Enhanced and PMA Dividend Enhanced (Shariah)

Source: PCM, Bloomberg, sorted by 12mth Blended Forward Yield, as of 28 February 2023

Breakdown by Sector (Shariah):

Source: PCM

Performance Chart (Shariah):

Source: PCM

Performance Snapshot (Shariah):

Source: PCM (*Since Inception 31/3/2020)

Although the portfolios had initially underperformed the benchmark due to the overexposure to certain healthcare stocks, they have since been able to achieve better returns than the benchmark over the past year, with positive one-year returns of 10.75% for the Conventional mandate and 6.28% for the Shariah mandate. This improvement in performance was achieved by modifying our stock selection model to dynamically screen and select stocks while also avoiding dividend traps. These adjustments helped us to better align the portfolio with our investment goals and achieve better performance. We will continue to closely monitor the portfolio’s performance and make further changes as necessary to ensure that it remains aligned with our investment strategy.

Comments on selected sectors/stocks that we are heavy weight in PMART Dividend Enhanced and PMA Dividend Enhanced:

1. Banks

We believe Malaysia banks will still do well in 2023 but investors may wonder if we are approaching peak Net Interest Margin (NIM) in the current rate upcycle. We believe banks should still record stable earnings growth in 2023 driven by higher net interest income and non-interest income as well as lower taxes (in absence of the one-off Prosperity Tax). Apart from attractive dividend yield, we believe banks’ asset quality is likely to stay resilient to any potential external slowdown. Streets are expecting RHBBANK and MAYBANK to deliver more than 10% return of equity (ROE) in 2023. AFFIN’s valuation is cheap, trading at c. 0.4x price-to-book, while ABMB’s focus in the SME segment should continue boost its loan growth moving forward.

2. REITS

REITs have shown strong performance in the latest quarter, with their revenue and net property income (NPI) reaching pre-pandemic levels. Despite fears of a global recession, the robust domestic economy and growing tourist numbers are expected to contribute to the continued growth of Retail REITS performance. This will bode well for KLCCP, SUNREIT, PAVREIT and IGBREIT. Separately, the increasing need for third-party logistics assets is creating a positive supply-demand scenario for Industrial REITs including the likes of AXREIT.

3. Utilities

Environmental, social and governance (ESG) concerns in the utilities sector have clouded investors in the past but we believe this has been overplayed. The utilities names that we invest in offer attractive dividend yields and stable earnings profile. Earnings resilience of gas utilities names like GASMSIA is backed by regulated assets while earnings for independent power producers (IPPs) such as MALAKOFF are supported by power purchase agreements (PPAs).

4. Property

Despite expectations of a subdued property sales outlook due to weaker loan applications and the potential impact of an OPR hike in 2023, our chosen property names such as MATRIX and UOADEV have a strong focus on the mid-market and affordable homes segments. This provides a solid foundation for new sales prospects and ensures that demand for these properties remains resilient. Moreover, those property names are supported by 5-7% dividend yield.

5. Plantation

Given the current lacklustre market conditions, CPO prices may continue to trade sideways. Therefore, we favour selected plantation companies that offer high dividend yields such as HSPLANT and TAANN, as they have demonstrated strong cash flow generation over the last two years.

6. Auto

Automakers’ earnings should remain solid driven by resilient domestic consumption. Furthermore, a weaker USD will benefit automakers such as BAUTO as this will improve their margins due to the decrease in import costs. Separately, automakers such as SIME that have exposure to EV models in the Malaysian market could take advantage of the tax exemption provided in Budget 2023, which applies to CKD EVs and CBU EVs until 2024.

Please click on the link to learn more or email us at cse.my@phillipcapital.com.my if you require any further information.

Disclaimer:

The information contained herein does not constitute an offer, invitation or solicitation to invest in Phillip Capital Management Sdn Bhd (“PCM”). This article has been reviewed and endorsed by the Executive Director (ED) of PCM. This article has not been reviewed by The Securities Commission Malaysia (SC). No part of this document may be circulated or reproduced without prior permission of PCM. This is not a collective investment scheme / unit trust fund. Any investment product or service offered by PCM is not obligations of, deposits in or guaranteed by PCM. Past performance is not necessarily indicative of future returns. Investments are subject to investment risks, including the possible loss of the principal amount invested. Investors should note that the value of the investment may rise as well as decline. If investors are in any doubt about any feature or nature of the investment, they should consult PCM to obtain further information including on the fees and charges involved before investing or seek other professional advice for their specific investment needs or financial situations. Whilst we have taken all reasonable care to ensure that the information contained in this publication is accurate, it does not guarantee the accuracy or completeness of this publication. Any information, opinion and views contained herein are subject to change without notice. We have not given any consideration to and have not made any investigation on your investment objectives, financial situation or your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of any persons acting on such information and advice.