How can we tell that this dividend income is good, bad or average?
There are 2 methods which we can use in making sound investment judgement and they are:
- By comparison with historical data
- By converting it into same/common denominator.
Historical Data: We need not have rocket science knowledge to understand what historical data means. It simply means that we look back at the dividend distribution declared in all those years before this year. From here, we find the mean data and then find the variance of each year's data. Finally, we find its standard deviation (SD). If current year's distribution swayed way high off the SD, then we say that the current distribution is GOOD. On the contrary, if the dividend is swayed way lower than the SD, we say the current dividend declaration is BAD!
Please see the table below (for illustration purpose):-
Year 1 dividend is 5.00%
Year 2 dividend is 6.00%
Year 3 dividend is 6.50%
Year 4 dividend is 6.60%
Year 5 dividend is 6.80%
Year 6 dividend is 6.60%
Please see the table below (for illustration purpose):-
Year 1 dividend is 5.00%
Year 2 dividend is 6.00%
Year 3 dividend is 6.50%
Year 4 dividend is 6.60%
Year 5 dividend is 6.80%
Year 6 dividend is 6.60%
From the table, the mean is calculated to be 6.25% which after further calculation, will give us a SD of 1.4950 or 1.50 to the nearest 2 decimal point. Therefore, if a declaration of distribution falls between 4.75% and 7.75% we can deduce it as an AVERAGE return. Anything lower than 4.75% is considered BAD and above 7.75% is GOOD.
Common Denominator: Personally, i think this method of comparison is easier to use than the historical type mentioned above. All we need to do is to transform the distribution units to a fraction of a 100 units. For instance, if a 6.6 sen a unit is declared as dividend, we convert all the holding units in hand into the same denominator that is to sen.
Example: If in hand you hold 10000 units that are entitled for the 6.60 sen a unit dividend, you need to multiply 6.60 sen with 10000 units, which is equals to RM 660.00. From here we find what is 6.60 sen's fraction out of the whole RM 660 or 660000 sen.
What is the fraction of 660000 sen from your invested capital, assuming you have invested RM1000.
The fraction is 66%. Remember , this is just an example!!
With this 66%, you are now in better position to make comparison with Fixed deposit rate, Property yield, Gold Investment etc etc, because all returns carry the same denominator.
