How dividends fit into my investment strategy (and when they don’t)

Dividends are one of the most debated topics in investing. Some investors won’t touch a stock without a decent yield, while others see dividends as a sign that a company has run out of growth ideas.

Like most things in investing, the truth lies somewhere in between.

Not all dividend strategies are the same

Let’s start by looking at the common dividend approaches companies take:

1. Dividend growth – These companies focus on increasing dividends year after year. The starting yield might be low, but the growth rate is attractive over time.

   
   

2. High-yield – These pay out a large portion of earnings as dividends, often yielding over 5%, but with little to no growth.

   
   

3. Fixed payout ratios – These maintain a consistent payout range based on earnings. They’re more flexible—open to cuts, suspensions, or even special dividends when needed.

   
   

4. Non-dividend payers – These companies reinvest earnings, buy back shares, repay debt or aren’t profitable yet.

Dividends are a tool, not a strategy

Dividends are just one way to return capital to shareholders. They’re not inherently good or bad. What matters is why a company is paying them and whether it makes sense given its growth runway.

And let’s not forget dividends are taxed. Unlike buybacks or reinvestment, dividends can interrupt compounding when you’re forced to pay the taxman.

Here’s how I think about it:

• Pay dividends when growth is limited – Mature, cash-rich companies with few reinvestment opportunities should return excess capital to shareholders.

  
  

• Watch for sustainability – A high dividend yield means nothing if it’s not backed by free cash flow. Too many companies overpromise and end up slashing payouts when the business turns.

  
  

• Reinvest when returns are high – If a company can reinvest at 15%+ returns, it shouldn’t be paying out most of its profits. Let those earnings compound instead.

  
  

• Business moat matters more than yield – I’d rather own a strong economic moat company with a modest dividend than a mediocre one with a fat yield.

  
  

  

  
  

When dividends raise red flags

Not all dividends are created equal. Sometimes, they’re more of a warning sign than a reward:

• Borrowing to pay dividends – If a company isn’t generating enough cash, using debt to fund dividends is a red flag. It’s not sustainable.

  
  

• Earnings over cash flow – Always check that dividends come from free cash flow, not just accounting profits. Earnings can be massaged. Cash is harder to fake.

  
  

• Too-high payout ratios – A company paying out 80%+ of its earnings leaves little room for error. It limits their flexibility during downturns.

  
  

• Better capital uses exist – If a company is paying dividends but also raising debt or issuing shares to fund growth, it signals poor capital discipline.

The role of dividends in my investment strategy

I used to focus on high-yield, stable dividend stocks, mainly Singapore REITs. My goal was then to build a dividend stream to help pay for my MBA. The yields were reliable and gave me something to reinvest along the way.

After cashing out to fund my MBA, I created a separate dividend portfolio. It still includes REITs, but I’ve also added Singapore banks. They offer strong dividends backed by solid fundamentals.

That said, I no longer chase yield.

If a great business happens to pay a dividend, perfect. But it’s not a requirement.

I’m still young and have a long investment runway ahead. With time on my side, I’m happy to own strong economic moat businesses that need time for the market to appreciate their value.

Even with the arrival of our little one, my risk appetite hasn’t changed much.

I’m still in the accumulation phase. And I’m confident in my ability to find undervalued companies with strong fundamentals—ones that will grow into their potential over the years.