Income Focus List: Top Dividend Stocks For Your Portfolio

Keppel Corp, China Resources and mainland Chinese banks were amongst the top performers.

OUT: Keppel Corp, China Resources Land, China Construction Bank, SPH REIT

IN: Far East Hospitality Trust, Bank of China, Netlink NBN Trust, Crown Castle International

Since we unveiled the 15 stocks that made the cut on the Income focus list, our favoured dividend stocks have delivered an average of about 9.89% in total returns (for the period 24 Aug 2017 – 24 Jan 2018), with 11 stocks posting positive gains over this period, while the remaining four were still languishing in the red (Table 1).

Keppel Corporation (SGX.BN4) was the runaway performer, with its share price rally driven by a sector recovery and contract flows. China Resources Land (HKEX.1109) also saw its share price turn red-hot on optimism that home sales will rebound this year. Meanwhile, the recent improvements in asset quality have led Agricultural Bank of China (HKEX.1288) and China Construction Bank (HKEX.939) to record strong gains since their inclusion on the Income Focus List.

CK Infrastructure (HKEX.1038), which derives a substantial portion of its profits from UK, was the worst performer as the GBP depreciated sharply against the HKD. ComfortDelGro (SGX.C52) was also punished by market participants as Grab's aggressive promotions had a worse-than-expected impact on its taxi business.

Table 1: Performance Of Individual Stocks Included On Income Focus List

Here Are Our Top Dividend Stocks!

We removed Keppel Corporation and China Resources Land as their low dividend yields no longer justify their places on the Income Focus List. We also removed SPH REIT (SGX.SK6U), given its lofty valuations, and replaced China Construction Bank with Bank of China (HKEX.3988), which currently trades at a deep discount relative to its peers despite having the best asset quality amongst the state-owned Chinese commercial banks. Far East Hospitality Trust (SGX.Q5T), Netlink NBN Trust (SGX.CJLU) and Crown Castle (NYSE.CCI) are the other newcomers to the list.

Are you looking to build a passive stream of dividend income to supplement your existing income sources? Then look no further! Here are the stocks that may warrant a place in your portfolio:

Table 2: Top Picks For Our Income Focus List

1. Keppel Infrastructure Trust

Resilient cash flows with strong earnings visibility.

Strong balance sheet supports future distributions.

Attractive return potential with high distribution yield of about 6.67%.

For investors who may wish to introduce some dividend-generating resilience into their investment portfolios, Keppel Infrastructure Trust (SGX.A7RU) may be worth a closer look. The trust has a diversified portfolio of recession-proof infrastructure assets that have facilitated its stable distributions over the quarters.

We like Keppel Infrastructure Trust for its highly resilient and predictable cash flows as most of its assets derive their revenues from availability-based payments. With a strong balance sheet, its future distributions are also unlikely to be threatened. Its distribution yield of 6.67% provides significant income and is attractive relative to most SGX-listed REITs and business trusts.

Related Article: Looking For Stable Distributions? This Infrastructure Trust Might Interest You!

2. Netlink NBN Trust

Monopoly status as the sole nationwide provider of residential fibre network in Singapore.

The majority of its revenue is recurring in nature, and guaranteed a 7% return on capital.

Distribution yield of 5.59% is line with the average 5.60% offered by Singapore REITs.

Given its monopoly status as the sole nationwide provider of residential fibre network in Singapore, Netlink NBN Trust (SGX.CJLU) is unlikely to face any competition due to the high barriers to entry. It earns about 63% of its revenues from residential connection charges, for which Netlink NBN Trust (NLT) receives a monthly recurring fee.

While a substantial part of its revenue is regulated in nature, NLT is able to earn a guaranteed 7% return on capital, which in turn provides stability of cash flows and distributions to unitholders. Its projected distribution yield of about 5.59% for projection year 2019 (from 1 April 2018 to 31 March 2019) is also in line with the 5.60% currently offered by Singapore REITs.

3. Far East Hospitality Trust

Singapore's tourism industry expected to undergo a potential cyclical upturn this year.

Focuses on mid-tier and upscale hotels – two segments that are showing signs of recovery.

Currently trading below book value, with an attractive distribution yield of 5.53%.

Singapore's tourism industry is expected to undergo a potential cyclical upturn this year, with tourist arrivals and trip durations both on the rise amidst a stabilisation in the global economy. The expected increase in demand for hotel rooms also coincides with a supply constraint as no new hotel sites have been released by the government over the last two years.

Given its focus on the mid-tier and upscale segments, both of which have seen an uptick in revenue per available room (RevPAR) in recent months, Far East Hospitality Trust (SGX.Q5T) will certainly be amongst the beneficiaries of the cyclical upturn. It is currently trading below its book value, with the estimated 5.53% distribution yield also adding to its investment appeal.

4. Singtel

Competitive domestic market mitigated by diversified revenue base.

Infocomm technology offerings to benefit from Singapore's Smart Nation move.

Forward dividend yield of 5.52% adds to its investment appeal.

The imminent entry of Singapore's fourth telco, TPG, is likely to intensify competition in the domestic mobile market. Given its diversified revenue streams and a stickier customer base, however, Singtel (SGX.Z74) is expected to be the least affected by TPG's entry, with its stakes in other Asian telecom operators helping to mitigate the increased competition in Singapore. Telkomsel, in particular, gives Singtel exposure to Indonesia, one of Asia's fastest-growing telecom markets.

Moreover, Singtel is focusing on its cloud computing, cyber-security and data analytics offerings, all of which could stand to benefit from Singapore's Smart Nation vision. Its forward dividend yield of 5.52% also adds to its investment appeal.

5. ComfortDelGro

Negatives have been largely priced in, with attractive dividend yield of 4.95%.

Balance sheet strength and strong cash flows safeguard shareholders from dividend cuts.

Uber tie-up could arrest taxi decline, while public transport segment remains a bright spot.

Despite its poor share price performance, we believe the negatives have largely been priced in. We continue to retain ComfortDelGro (SGX.C52) on our Income Focus List as our investment case for the transportation company remains intact.

At a forecasted 4.95% this year, ComfortDelGro's dividend yield is not only attractive, but also fairly sustainable at this moment, especially with its robust balance sheet and cash flow generation prowess. While its taxi business faces a rough and bumpy road ahead, its tie-up with Uber could help arrest the decline. The public transport segment is also expected to be a future growth driver that could help pick up some of the slack.

Related Article: Is ComfortDelGro At Risk Of A Dividend Cut?

6. China's State-Owned Commercial Banks

Formation of bad debts in the Chinese economy has slowed in recent quarters.

A recovery in net interest margins a potential catalyst for share prices to trend upward.

Selected state-owned commercial banks are still trading slightly below book values.

While there are reasons to be cautious over the future prospects of China's commercial banks, they are by no means doomed to an imminent collapse. Improvements in asset quality stemming from the government's supply-side reforms and a stabilisation in China's economy, as well as a potential recovery in net interest margins, are likely to be potential catalysts for the share prices of China's banks to further trend upward.

As stellar share price performances have pushed up the valuations of the banking sector as a whole, it pays to be selective: we prefer Agricultural Bank of China (HKEX.1288) and Bank of China (HKEX.939) due to their strong asset quality, cheaper valuations and attractive dividend yields.

Related Article: Light At The End Of The Tunnel for China's Banking Sector?

7. Guangdong Investment

Water business is backed by pre-determined payments from the Hong Kong government.

Owns other infrastructure assets that generate stable and consistent cash flows.

Dividend yield of 4.79% looks rock-solid given its healthy balance sheet.

Guangdong Investment (HKEX.270) is a subsidiary of the state-owned Guangdong Holdings and is primarily engaged in water distribution. It supplies about 63.7% of Hong Kong's water needs, and receives a pre-determined amount of revenue from the Hong Kong government regardless of the actual volume of water supplied, facilitating the stable growth in its revenue over the years.

Guangdong Investment also owns other infrastructure assets such as power plants and toll roads, most of which generate stable and consistent cash flows that insulate Guangdong Investment from the economic cycle. Its estimated dividend yield of 4.79% also looks rock-solid given its healthy balance sheet, and will appeal to investors looking for defensive dividend plays.

Related Article: Guangdong Investment: A Rock-Solid 4.28% Dividend Yield!

8. China Mobile

Mobile market has room for growth as 4G penetration remains low in China.

Dividend yield of about 4.44% supported by strong balance sheet and healthy cash flows.

Ample room to increase pay-out ratio, which could potentially trigger a share price re-rating.

Not only does it have the largest mobile customer base in China, China Mobile (HKEX.941) has the widest 4G coverage that puts it in pole position to capitalise on China's burgeoning mobile market, which still has room for further growth.

Its dividend yield over the next two years is also attractive at approximately 4.44%, supported by its strong balance sheet and healthy cash flow, which is likely to improve, given that management has guided for lower capital expenditures as its 4G network buildout nears completion. Moreover, with ample room to increase its pay-out ratio, a higher pay-out ratio in the future could potentially trigger a further re-rating of China Mobile's share price.

Related Article: China Mobile: A Viable Addition To Any Dividend Stock Portfolio

9. Shenzhen Expressway

Healthy balance sheet with stable cash flows from well-established toll road business.

Limited competition with first right of refusal on new projects in Shenzhen.

Branching out into environmental protection business to diversify income.

Shenzhen Expressway (HKEX.548) is the largest toll road operator in Shenzhen, a road congestion hotspot with strong traffic volumes. Its well-established toll roads have brought in stable cash flows and supported its dividend pay-outs over the years. Shenzhen Expressway also has a fairly low pay-out ratio of about 41.0% that provides a safety buffer for its estimated 4.41% dividend yield.

Moreover, competition is limited and the company enjoys first-right-of-refusal on new projects in Shenzhen, courtesy of its affiliation with the Shenzhen government. Shenzhen Expressway is also branching out into the environmental protection business for its next leg of growth.

10. Crown Castle International

84% of income base is recurring in nature, providing excellent cash flow stability.

Revenues secured by long-term contracts, with built-in rent escalations and renewal options.

Offers an attractive distribution yield of 3.86% this year.

Crown Castle International (NYSE.CCI) is the largest provider of shared wireless infrastructure in the US, leasing out telecommunications towers to wireless carriers, who rely on Crown Castle's infrastructure to provide services to consumers and businesses.

About 84% of Crown Castle's revenue is recurring in nature, secured by long-term leases of about 10 – 15 years, with built-in rent escalations and renewal options, providing excellent cash flow stability. The company has a weighted-average remaining contract term of five years (excluding renewals) and approximately USD 18 billion of expected future cash in-flows. Given its status as a REIT, Castle Crown pays out 90% of its distributable income to its unitholders, offering an attractive distribution yield of 3.86% this year.

11. CK Infrastructure Holdings

Share price performance has been weak, but dividend yield of 3.84% remains attractive.

Diversified portfolio of infrastructure assets that generate stable and consistent cash flows.

Robust balance sheet to support dividends and future acquisitions.

While CK Infrastructure (HKEX.1038) turned in a disappointing share price performance since its inclusion on the Income Focus List, its dividend yield of 3.84% remains attractive and is supported by a diversified portfolio of defensive infrastructure assets, most of which are regulated utilities that tend to generate stable and consistent cash flows.

Its robust balance sheet also ensures dividend sustainability and puts CK Infrastructure on a firm footing to pursue acquisitions that will boost future earnings growth. It is currently considering a bid for Arqiva, a leading UK telecommunications infrastructure provider, whose tower assets provide stable cash in-flows, as well as German metering company Ista, which rents metering equipment to commercial and residential properties.

Related Article: Anchor Your Portfolio With Defensive Income Stocks!

12. Singapore Exchange

Bottom line supported by improved market sentiment and efforts to boost market liquidity.

Pipelines of new product initiatives are also expected to drive future volumes.

Dividend yield remains attractive, supported by strong cash flows and healthy balance sheet.

As the profitability of Singapore Exchange (SGX.S68) is dependent on trading volumes and market activities, its bottom line is likely to be supported by the improved market sentiment in recent times and ongoing efforts to boost market liquidity. Its pipeline of new product initiatives – dual class shares and Indian single stock futures – as well as recently launched Daily Leveraged Certificates, are also expected to drive future volumes.

At 3.81%, SGX's forward dividend yield remains attractive and is supported by its strong cash flows and healthy balance sheet. Its strong financial position also provides ample dry powder for future acquisitions to supplement growth.

13. Frasers Centrepoint Limited

Diversified exposure to residential, commercial and hospitality real estate.

Recurring income base provides resilience and stability.

Offers one of the highest dividend yield amongst Singapore property developers.

Frasers Centrepoint Limited (SGX.TQ5) is one of Singapore's largest property conglomerate by total assets, with diversified exposure to residential, commercial and hospitality real estate that spans Singapore, Australia, UK, China and Southeast Asia. It holds about a third of its assets through its four SGX-listed REITs: Frasers Centrepoint Trust (SGX.J69U), Frasers Commercial Trust (SGX.ND8U), Frasers Hospitality Trust (SGX.ACV) and Frasers Logistics & Industrial Trust (SGX.BUOU).

Its resilience and stability is further aided by its recurring income base, which made up about 61% of its EBIT in 2017. At 3.68%, FCL's dividend yield is also one of the highest amongst Singapore property developers.

Related Article: Frasers Centrepoint Ltd: The Highest Dividend Yielding Property Developer!

14. Sheng Siong

Resilient business model with healthy margins and mass-market positioning.

Increased warehouse capacity and greater fresh offerings to improve margins.

Opportunities for new store openings and China expansion to drive future growth.

We like Sheng Siong (SGX.OV8) for its resilient business model, courtesy of its mass-market positioning and healthy margins. Its warehouse expansion, due to be completed in 2018, is expected to add another 10% capacity that will help enhance the company's margins through greater economies of scale and increased fresh food offerings.

While Sheng Siong reduced its dividend pay-out ratio recently to pursue growth, its fundamentals remain intact. As HDB puts up about 10 – 15 new supermarket units for bidding, Sheng Siong is likely to expand its store network, with its China expansion also helping to drive future growth.

Related Article: Why Singapore's Grocery Retailers Are A Buy

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds a NIL position in the abovementioned securities. The analyst who produced this report has positions in ComfortDelGro and Singtel.

The Research Team is part of iFAST Financial Pte Ltd.