It's been 4 years since I've held any individual stocks in my portfolio. I decided to explore the markets again for stocks to build a portfolio on top of my existing ETF investment portfolio using spare cash that I have accumulated from surplus in my monthly budget.
Based on my calculations, the ETF investment portfolio that I'm currently building will be more efficient left alone till 62 before I start drawing down from it. So I've been thinking about setting up another investment portfolio.
The purpose is to build a separate investment portfolio that has the potential to provide retirement income before I reach 62 and complement the excess CPF money that I will have in my CPF accounts after 55.
I intend to make this portfolio contain a mix of value, growth and dividend stocks, with a larger portion being dividend stocks.
As a start, I decided to pick a safer stock to invest in. After screening through a number of stocks, I decided to invest in NetLink Trust for dividend income.
Here are some of the criteria I used to evaluate my purchase.
Resilient business model and strong economic moat
This is an important one for me because of my past history in stock investment. Each time I invest in a stock, I don't even look at their performance, much less sell them for many years.
Netlink NBN Trust has a unique economic moat since it designs, builds, owns and operates the passive fibre network infrastructure of Singapore’s Next Generation Nationwide Broadband Network. The trust’s extensive network provides nationwide coverage to residential homes and non-residential premises in mainland Singapore and its connected islands.
In the next few years, I can only foresee that more service providers will be moving their customers over from cable services to fibre optics connection (if they have not already done so already) and fibre optics connectivity will be the norm in Singapore. That represents a stable recurring (and potentially slowly increasing) revenue for the company.
On the technology front, there's nothing more advanced than fibre optics communication and when one comes up, it will take several years before it reaches a level maturity that the Singapore government would be willing to take a risk and make a nationwide change from fibre optics.
In my opinion, the number of residential fibre optics users is also unlikely to decrease, ever. If the Singapore economy goes into recession and you will probably choose to shop less and eat at home more often. But would you think about cancelling your Internet service? I highly doubt so.
Pays dividend and dividend per share is stable or rising
In 2018, NetLink Trust paid out 0.068 cents in dividends over 2 periods (May and November). That's around 8.4% dividend yield at the time of this article where the last transacted price is $0.81 per share.
While what I've learnt is that we want to pick stocks that have a stable or rising dividend paid for at least 5 years, I'm choosing to make a concession given that NetLink Trust's distribution policy is to distribute 100% of its cash available for distribution ("CAFD").
Decent market capitalisation
In most of the investment workshops I've attended, the trainers have mentioned that market capitalisation is important in screening stocks since it generally corresponds to a company's stage in its business development.
A company with low market capitalisation is seen as less conservative since it has a high chance for massive growth and also a high risk of massive failure. A company with mid to large market capitalisation is naturally considered much safer with lower risk of getting wiped out in a recession. However, they often also have lower chance for growth since they would have already achieved a certain stage of growth.
Since the purpose of this investment is for stable dividend payouts, mid to large market capitalisation is preferred. NetLink Trust has a market capitalisation of $3.16 billion which makes it a mid cap stock.
Net Asset Value
The Net Asset Value of a company represents its net value as an entity and is calculated by using subtracting the total value of its liabilities with the total value of the company’s assets.
We can use the net asset value of a company as one of the measurements to tell if the current share price is worth paying for. To do this easily, we will take the net asset value of the company, divided by the total number of shares to derive the net asset value per share. Using the net asset value per share, we can then compare it with the current share price of the company.
If the net asset value per share is higher than the current share price, then it is an indication that the company could be undervalued. To truly tell if a company is undervalued, we will need to examine the company's profitability and operating cash flow to see if the company has any issues.
I'll write about it next time when I'm looking at value stocks.
For NetLink Trust, its net asset value is $0.77 and that's pretty close to the current price of $0.81 per share (5% premium of net asset value). I think it's a fair price.
A company with a current ratio less than 1 most likely does not have the capital on hand to meet its short-term obligations if they were all due at once. Likewise, a company with a current ratio greater than 1 indicates that it has the financial resources to remain solvent in the short-term.
For long-term investors like me, this is important as we will always keep current ratio in mind whenever we re-examine our portfolio to ensure that the companies we invest in have the financial strength to weather through any short term turbulence, should its debtors come knocking on its doors.
With NetLink Trust having a current ratio of 2.64, it gives me the confidence that NetLink Trust has the financial strength to keep the business going.
Irrelevance of dividend payout ratio
I struggled with this at first because by plugging in the formula, the dividend payout ratio came out to be almost 3 times the earnings and looked crazy unsustainable.
That was until I researched further and after reading an article on probutterfly.com, I learnt that the Trust may choose to distribute dividends from operating cash flow instead of accounting profits like regular companies.
Therefore dividend payout ratio as a screening metric for NetLink Trust is no longer considered.
Going in with 60% confidence
I can't say I'm spotting sure wins here. I mean, I've only attended a couple of workshops and picked up some knowledge about investing. I'm trying to put them to good use by making investing decisions based on data.
My purpose for picking up NetLink Trust is purely for its dividend payouts so if it fails to deliver its promise on dividends, I'll remove it from my portfolio.
What are your thoughts about NetLink Trust as a dividend stock investment? Do you think I should be using other metrics to analyse this stock instead? Please share them in the comments below.
You won't trust Mickey Mouse to manage your portfolio so there's no reason to trust Mickey J to make investment decisions for you either. The contents in this article should be considered as entertainment until you do your own due diligence by spending time researching about stocks and make your own investment decisions.