3 checks we use before buying dividend stocks for income in Singapore

What happened?

Dividend stocks are often seen as one way for investors to build a stream of passive income over time.

Instead of focusing only on the dividend paid today, the appeal is in companies that may be able to maintain or gradually raise their payouts over the years.

A modest dividend yield today may become more meaningful over time if the company is able to grow its earnings and dividends consistently.

However, not all dividend stocks are built the same, as some companies may be able to deliver a growing stream of income while others could cut payouts when business conditions become more challenging.

That is why I think investors need to look beyond the highest dividend yield when choosing stocks for income. 

Within Beansprout's four pots of wealth framework, dividend stocks would usually sit within the Income Pot, where we look for assets that can provide recurring income while still having room for payouts to grow over time.

In this article, we focus on one important part of that process: three simple checks that help us decide whether a dividend stock deserves deeper research.

Why dividend stocks matter for the Income Pot 

A good dividend stock does two things.

It pays you regularly, and it has the potential to increase that payment over time.

That second part is important. 

Over the years, even a modest starting yield can become more meaningful if the dividend per share keeps rising.

For example, a company paying a 4% dividend yield today may not look very exciting at first glance.

But if the company is able to grow its dividend consistently, your yield on original cost may rise over time.

This is why dividend investing is different from simply buying the highest-yielding stock in the market.

Rather than chasing the biggest payout today, the focus is on building an income stream that can stay relatively steady even when conditions change.

This fits into Beansprout’s Income Pot, which focuses on assets that can provide recurring dividends, coupons or distributions while adding more stability to the overall portfolio.

It also matters because inflation can reduce the value of a fixed stream of income.

A dividend that grows steadily may help the Income Pot keep pace with rising living costs, although dividends are never guaranteed.

That is why I would still start with quality.

A company that raises dividends sustainably usually needs growing earnings and a sound balance sheet to support the payout.

3 simple steps to screen for the best dividend stocks

For me, the screening process should start with the business, not the yield.

A high dividend yield may look attractive, but it does not mean much if earnings are falling, debt is rising or cash flow is weak.

At Beansprout, we look at dividend stocks across three areas: fundamental strength, financial health and valuation.

The order matters.

First, we want to know whether the business is growing its earnings.

Next, we check whether the company has the financial strength to keep supporting its dividend.

Only after that do we look at valuation, including whether the forward dividend yield offers enough compensation for the risk involved.

I would work through the three areas in this order, because a stock that looks attractively priced but fails on earnings growth or cash flow may not be a bargain.

#1 – Fundamental strength

Step 1: Check whether earnings per share has grown

The first thing I would look at is earnings per share, or EPS.

EPS measures how much profit the company earns for each share.

For a dividend to grow sustainably, earnings need to grow too. 

A company can maintain dividends for a while even when earnings are weak, but that cannot continue forever.

At some point, the payout has to be supported by profits or cash flow.

Rather than focusing on just one year, which can be affected by temporary factors, we compare the company's latest EPS with its EPS three years ago.

As a starting point, I would prefer to see the latest EPS higher than it was three years ago.

This suggests that the company's earnings base has expanded over time, giving it more capacity to support its dividends. 

Formula: 

You can find EPS in the company’s annual report, financial statements or results presentation, often in the income statement or financial highlights section.

Where available, I would use diluted EPS so that the comparison is more consistent across the years.

#2 – Financial health

Step 2: Is the balance sheet strong?

Debt is not always bad. Many companies use borrowings to expand, invest or improve returns for shareholders.

But too much debt can make a dividend less reliable.

When interest costs rise or earnings fall, a company with a stretched balance sheet may have less room to maintain dividends.

For most non-financial companies, we use net debt to equity as a simple measure of balance sheet strength.

Formula:

For many non-financial companies, I would prefer net debt to equity to be below 50%.

However, I would not treat this as a hard rule across every sector. Banks, insurers and REITs should be assessed using different metrics.

For REITs, for example, investors should look at aggregate leverage, interest coverage ratio, debt maturity profile and the proportion of fixed-rate debt.

What I want to know is whether the company can keep paying dividends if business conditions become tougher. 

The trend in debt levels matters too.

A company reducing debt while growing dividends is usually showing good discipline.

A company taking on more debt mainly to support dividends deserves more caution.

Banks are different because borrowing and lending are part of their core business. Net gearing is therefore not a useful measure of financial strength for a bank.

Instead, we focus on two measures:

• CET1 (Common Equity Tier 1) ratio: Measures how much high-quality capital a bank has relative to the risks it is taking. This capital acts as a buffer against potential losses. As a guide, we prefer a CET1 ratio above 13%, broadly in line with the levels maintained by Singapore’s local banks and comfortably above regulatory requirements.
• NPL (non-performing loan) ratio: Measures the proportion of loans where borrowers are having difficulty making repayments. As a guide, we prefer an NPL ratio below 1.5%. A rising NPL ratio can be an early sign that asset quality is weakening, even when profits still appear healthy.

So for the second check, our thresholds are simple:

#3 – Valuation 

Step 3: Does the forward dividend yield beat the Singapore 10-year government bond yield?

Only after looking at earnings and financial strength would I consider the dividend yield.

Dividend stocks carry more risk than Singapore government bonds. Their share prices can fall and dividends can be reduced.

I therefore want the forward dividend yield to compensate investors for taking that additional risk.

Rather than setting a fixed dividend yield hurdle, we compare the stock’s forward dividend yield with the Singapore 10-year government bond yield.

Formula:

The exact hurdle should change with market conditions.

As a guide, we prefer the stock’s forward dividend yield to be higher than the Singapore 10-year government bond yield.

This makes the hurdle more responsive to market conditions.

When government bond yields rise, dividend stocks need to offer a higher yield to remain attractive relative to a lower-risk alternative.

When bond yields fall, quality dividend stocks may become relatively more attractive.

However, a high dividend yield alone is not enough.

If a stock offers a very high yield because its share price has fallen sharply, I would still want to understand whether earnings and the balance sheet are strong enough to support the dividend.

Our 3-check Income Pot stock screener

For most non-financial companies, our framework can be summarised simply:

For banks, we make one adjustment to the financial strength check:

What would Beansprout do?

When looking at dividend stocks, I would not start with the highest yield.

I would first ask whether the company is earning more than it did three years ago.

Next, I would check whether its balance sheet is strong enough to withstand tougher conditions. For most companies, that means looking for net gearing below 50%. For banks, we instead look for a CET1 ratio above 13% and an NPL ratio below 1.5%.

Only then would I look at whether the forward dividend yield is attractive compared with the Singapore 10-year government bond yield.

A dividend stock does not need to be perfect across every measure.

But if it fails on earnings growth and balance sheet strength, I would be careful even if the yield looks attractive.

If the yield is high mainly because the share price has fallen sharply, I would want to understand what the market is worried about.

If a dividend stock offers a reasonable yield and passes these checks, I may put it on a watchlist for deeper research.

Dividend stocks can play a useful role in the Income Pot, especially for investors who want cash flow that may grow over time. 

But they are still equities, so the share price can fall and dividends are not guaranteed.

For me, the aim is not to find the highest-yielding stock. It is to find companies where the dividend has a reasonable chance of being sustained and growing over time.

A good income stock should help the portfolio feel more stable.

This is also why I would still see Singapore stocks as a core part of a globally diversified portfolio, especially for investors looking for dividend income.

Earlier, we also shared that we would consider looking beyond Singapore REITs to Singapore blue chip stocks for more diversified dividend income, especially when the dividends are supported by earnings growth, strong balance sheets and sustainable payout ratios.

You may also consider combining different sources of dividends to build a more resilient income portfolio over time. Learn how to build a more dependable stream of income that can hold up across cycles here.

If you’d like to screen for Singapore stocks with attractive dividend yields and potential upside, you can explore our Singapore dividend stocks screener.

Learn more about Beansprout's four pots of wealth framework to grow your wealth with clarity here. 

If you are looking for higher-conviction ideas outside the Income Pot, you can also read how we screen for growth stocks in the Opportunity Pot here.

Did any dividend stocks on your watchlist pass these checks? Share your thoughts in the comments below or join the discussion in our Beansprout Telegram community.

Planning to invest in stocks for dividend income? Check out Beansprout's guide to the best stock trading platforms in Singapore with the latest promotions and see the latest promotions and sign-up rewards available. 

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