Though there are many different kinds of businesses out there, only a few of them are able to pay out a consistent and predictable dividend. These types of businesses have stable operating characteristics and/or consistent demand for their products and services, which allows them to generate large amounts of free cash flow that can be used to pay out steady dividends.
Income investors generally embrace such companies as their predictability and stability offer both peace of mind and a steady stream of dividends. However, investors should also note that such businesses could occasionally be subject to disruption from technology or new competitors, and there is still a constant need to keep an eye on the business to ensure it still enjoys great economic characteristics.
Here are four types of businesses income investors will love.
Utilities provide an essential service, such as electricity or treated water. Such businesses tend to operate as a monopoly and are heavily regulated so they do not exploit their competitive position to generate supernormal profits. Tariffs are regulated and capped by the government and are sufficient to cover the utility’s cost of investment and running cost.
Though such strict regulations stifle the utility’s ability to grow meaningfully, this also means such companies’ cash-flow generation is stable, and demand for their services remains consistent. As a result, utilities usually are able to generate good levels of free cash flow (FCF) and can pay out steady dividends.
REITs are a great source of dividends for income investors as they are required to pay out 90% of their earnings in order to enjoy tax-free status. In addition, REITs own a portfolio of physical properties that can act as collateral for the loans taken up. The rental from leases is generally fixed for a few years, providing great income visibility for the REIT.
Some of the better-performing REITs out there with strong sponsors include Mapletree Commercial Trust (SGX: N21U) and Frasers Centrepoint Trust (SGX: J69U).
The healthcare industry has always been known to be resistant to economic cycles as people fall sick and require medication no matter what the economy is like. Hospitals, clinics, and healthcare facilities enjoy consistent and stable demand for services, allowing many such businesses to generate sustainable levels of FCF. Dividends from well-run healthcare companies are seen as predictable and stable. Some examples of healthcare companies are Raffles Medical Group Ltd (SGX: BSL) and Singapore O&G Ltd (SGX: 1D8).
Finally, the fourth type of business income investors will love is the education sector. As education is generally viewed as an essential good and something parents will invest in for their child’s development and job prospects, companies in the sector enjoy sustained and growing demand for their services.
Of course, investors need to be discerning when it comes to education providers as there is also a lot of competition within the sector. A reputable education provider with a long track record of growth in student numbers should be able to generate steady FCF and pay out consistent dividends.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of Mapletree Commercial Trust, Frasers Centrepoint Trust, Raffles Medical Group Ltd, and Singapore O&G Ltd. Motley Fool Singapore contributor Royston Yang owns shares in Raffles Medical Group Ltd.
Motley Fool Singapore 2019