Tuesday, July 30, 2013

[Dividend Investing] Why I bought Aboitiz Power shares below P35

Recently, I withdrew a portion of my bond fund which already profited from the bond fund boost this year. FAMI is already at 18% in its first half of the year.

I am following this 75%-25% guide, where you shift your investments from Stocks to Bonds or vice versa depending on the market. We are currently at record low interest rates, and I feel that BSP will increase its interest rates eventually (probably next year). When this happens, long term bond funds will be less profitable. I'm looking for an alternative for the money I had withdrawn and I chose to do a dividend investing. Dividend investing is a strategy to buy stocks that gives consistent and relatively bigger cash dividends (>2%).

An alternative to bonds are preferred stocks. Preferred stocks give fixed and usually the highest cash dividends in the stock market e.g. SMC2A with an annual dividend rate of 7.5% (and a step-up rate after 5 years). Preferred stock prices are relatively stable, you can check their charts that the range they are traded isn't large (but any stock is still volatile under certain market conditions). But I personally didn't go for preferred stocks. I chose a common stock, AP, just because my risk appetite is bigger, I guess. I want the opportunity not only of a good dividend yield, but also the possibility of a good yield from a share price increase if I think that the stock is undervalued.

That's why it comes to this. I chose among the blue chips which gives a good (>2%) cash dividend. There are several index stocks that meets this criteria: PLDT (TEL), Globe (GLO), Aboitiz Power (AP) and Meralco (MER). TEL has the highest cash dividends among them (5%-6%+ I think).

Among the choices, I picked AP to be my cash dividend strategy. It gives a lower (4%-5%) dividend than TEL but there are other factors I considered in choosing AP over the others. I've said this before, and I'll say it again, I find Aboitiz companies to have good management and good value (low P/E ratio). A low P/E ratio would indicate relative stability and an opportunity for share price increase. Also, AP is in power generation business, so it should be relatively stable unless we all go off the grid and use solar cells to power our homes.

In summary, I chose Aboitiz Power (AP) as my cash div strategy because of 1) consistent and bigger than average cash div returns 2) It's part of the index a.k.a. blue chip companies. 3) Good management. 4) It's a bargain (low P/E ratio).

My buy range is 31-35 and it will most likely fall on the range again, even below 34, since the Ghost month (Aug) is coming; this is when I'll add more shares. Above is my personal opinion only, it's based on my research and I do not suggest you just follow what is written here, I urge you to do your own research using the methodology above and come up with your own list and your own choice. Of course it would be great if we have the same choice.

How about you? Are you considering a dividend investing strategy? Share your insights in the comment section below.

Note that for dividends there is a 10% tax. The aforementioned returns do not deduct the tax.

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