(02-09-2012, 09:59 PM)freedom Wrote: [ -> ]if the bear market is long enough, there is no guarantee that you have enough dividend to see you through. Seldom, companies can maintain dividend when business activity is low no matter how much margin you enjoy.
It is true that not many companies can maintain their dividends in bad times. But an investor is not required to invest into every dividend-paying stock out there. It pays to be selective.
Those who blindly bought REITs and shipping trusts on the basis of passive income learnt this the hard way when many REITs destroyed value via rights issues, and many shipping trusts cut or even suspended their distributions.
Personally, if I had to go on a 10-year vacation with no ability to monitor the portfolio, and I was required to live off the dividends, my portfolio would look very different from my current one, where I am able to actively monitor and make changes any day I want.
For a 10-year zero-maintenance portfolio, my first priority would be the safety of the dividend. Evidence of a sustainable dividend might include:
1) a large cash buffer, sufficient to pay several years' worth of dividends at the current rate; and
2) a relatively low payout ratio (say 50% maximum), such that the absolute cash payout can be maintained even if earnings decline materially.
Yield is a function of price and would largely be secondary to the safety of the dividend, though obviously if your portfolio yields 2% in aggregate you will need a very large portfolio to generate an acceptable income.
In the Singapore context I would personally suggest 3% as the minimum, though 5% would be much better. 7% or more would suggest heavy weighting in REITs, not a good idea since REITs are fundamentally acquisition vehicles (which means rights issues that you need to deal with, breaking the zero-maintenance requirement).
Other things that would suggest a sustainable dividend:
3) business is of a steady and recurring type e.g. consumables (food, medical supplies, toiletries etc), utilities (water, electricity, energy, telecommunications);
4) a long history (10 years or more) of paying dividends; and
5) a strong balance sheet. For industrial-type companies, perhaps total debt should not be more than 1/3 of total assets, for utilities perhaps 1/2. These are upper limits, the investor may well prefer a totally debt-free company for peace of mind, though for utilities this is near-impossible.
Note that meeting just one of the above criteria would probably not suffice. At the time it went bankrupt in 1970, the Penn Central railway had an unbroken dividend record going back over 100 years.
One simple rule of thumb: the lower the future maintenance, the higher the upfront investment of time and effort.
As usual, YMMV.