Passive Income Investing &

The Power of Dividends Unveiled

Passive income comes in all shapes and sizes. It can take the
form of rental income from a real estate property that you
own, interest from your savings account, or royalties from
content that you created. For the purpose of this e-book
however, we will focus solely on dividend paying securities,
which in our view is the most optimal form of passive income
from a wealth creation standpoint.

2
01 | Passive Income
Passive income is akin to putting your money
to work while you take a back. Instead of relying
solely on the traditional 9-to-5, you’re placing
your trust in your assets to generate returns.
Be it dividend stocks or Real Estate Investment
Trusts (REITs), these financial instruments become
your partners in the pursuit of financial growth.
However, it’s important to acknowledge that
success in passive income investing requires an
initial investment of not just your money, but your
time and effort as well.
While passive income might evoke images of
lounging on the beach sipping cocktails, it’s not
synonymous with leisure. It’s a strategic move, an
investment in your financial future that requires
upfront effort. Passive income investing entails
making well-informed decisions, understanding
the market dynamics, and selecting the right
assets that will work tirelessly to grow your wealth.
It is similar to planting the seeds of financial
independence – it demands care and attention
to ensure a positive outcome.

Did you know?

Investing vs Saving
Investing is the art of making your money work for you, with the primary objective of growing
your wealth over time.

Consider this chart: Eric deposits ₱3,000 per year for 20 years into a savings account with a 1%
interest rate, while Mark invests the same amount annually in a portfolio that averages a 6% return.

The key difference lies in the potential for growth. While savings provide security, investments have
the potential to significantly multiply your wealth over the long haul.

3
01 | Passive Income

Keeping up with Inflation

One of the key goals of investing is to maintain the value of your capital and
exceed the pace of inflation. Consider this chart: Your ₱50,000 today will only
be able to purchase ₱27,684 worth of goods after 20 years.

02 | What is a dividend?
Dividends are a portion of the profit that a company decides to share with the people who own its stock.
When a company makes money, it can choose to give some of that money back to its stockholders as a
way of sharing its success. It’s like getting a small piece of the money the company earned.

The best dividend stocks are those that pay dividends on a regular basis and increase their dividend
payouts over time.

8 Things You Need to Know About Dividends

Dividends are a meaningful portion
of stock returns.
Dividends are a significant part of stock
returns, contributing substantially to overall
market gains, and reinvesting them can
boost your long-term wealth. In the S&P500,
dividends have contributed approximately
40% of total return since 1930.
Dividends come in various frequencies.
Dividends vary in frequency, with companies
paying them quarterly, semi-annually, or
annually, so understanding the schedule is
crucial for effective investment planning.
Dividends are different from capital gains.
Dividends represent earnings distributed
to shareholders, while capital gains result
from selling stocks at a higher price, with the
former authorized by the board of directors
and the latter tied to stock price fluctuations.
Dividends can protect from inflation.
Investing in dividend-paying stocks, especially
those with consistent increases, helps protect
against inflation, ensuring a steady income
stream. During periods of high inflation,
stocks that have increased their dividends the
most have outperformed the overall market.

4
02 | What is a dividend?
Key Dates to Remember
Ex-Dividend Date
The date when shareholders are
no longer qualified to receive the dividend.
Payment Date
The date when dividends will be paid
and distributed to all eligible shareholders.
Dividend stocks are usually less volatile
compared to non-dividend stocks.
Dividend stocks tend to be less volatile, providing
stability and acting as a cushion during market
downturns. Dividend growth stocks in particular
tend to be of higher quality than those of the
broader market in terms of earnings quality and
leverage.
Dividend stocks can be found across
different sectors.
Dividend stocks can be found in various sectors,
allowing investors to diversify their portfolios
for risk management and better returns.
Dividend paying stocks are
not immune to market downturns.
Although more stable, dividend-paying stocks
may reduce or eliminate payouts during economic
crises when companies face financial challenges.
This fact emphasizes the need to continually
assess the dividend safety and growth of the
dividend-paying stock in your portfolio.
Three types of dividend-paying securities are
common shares, preferred shares, or REITs.
Dividends can be received from common stocks,
preferred stocks, or Real Estate Investment Trusts
(REITs), each with distinct characteristics and
benefits.
Example:
Ex-Dividend Date – August 15 (Tuesday)
Payment Date – August 30
In order to qualify for the dividend,
you must own the stock by August 14 (Monday).
5
02 | What is a dividend?

Three Types of Dividend Paying Securities

Common Stocks
Common stocks are the most well-known type of equity
investment. When you purchase common stocks of a company,
you become a partial owner and have a claim to the company’s
assets and earnings. As an owner, you have the potential to benefit
from both capital appreciation and dividends. However, common
stock dividends are not fixed and can vary based on the company’s
performance. In good times, companies may distribute higher
dividends to shareholders, but in challenging periods, they may
reduce or even omit dividend payments. Make sure to check the
stock’s dividend history before investing.

Preferred Stocks
Preferred stocks are assets that share the characteristics
of both common stocks and bonds. Investors who hold
preferred stocks are prioritized when it comes to the payment
of dividends and the claiming of company assets during
liquidation. One significant advantage of preferred stocks
is that they usually offer fixed dividends. Companies pay
dividends to preferred shareholders at regular intervals, and
these dividends have a predetermined rate or percentage.
This feature makes preferred stocks attractive to income-
oriented investors looking for a more stable income stream.

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts are relatively new in the Philippine
Stock Market. Although they have been recognized globally
for many years, it wasn’t until 2020 when the first ever REIT by
Ayala Land made its way onto the PSE. REITs offer investors an
opportunity to participate in the real estate industry without the
need to directly purchase physical properties. They operate around
income-generating real estate assets like malls, condominiums, and
office spaces. What makes REITs attractive is that they are required
to pay 90% of their earnings to shareholders as dividends.

Some of the advantages of investing in REITs over an outright purchase of a property are:

• Lower investment minimum: The ability to buy • Diversification: REITs invest in a variety of
a single share of stock makes REIT investing a properties so you are not exposed to the risk of
more accessible investment vehicle. a single property underperforming.

• REITs are required to pay out at least 90% of
their taxable income to shareholders in the form
of dividends, providing investors with a potential
stream of steady income.
• Liquidity: REITs trade on a stock exchange
allowing you to quickly enter or exit an
investment.
• Professionally managed: REITs are managed by
experienced professionals who are responsible
for selecting and managing properties in the
portfolio.

6
02 | What is a dividend?

8 Things You Need to Know about

Real Estate Investment Trusts (REITs)
In the Philippines, the primary obstacle hindering real estate investments are soaring
property prices, substantial taxes, and challenges associated with liquidating assets.
Luckily, with the country introducing its first Real Estate Investment Trust (REIT) back
in 2020, becoming a real estate investor isn’t as difficult anymore.

What is a REIT? can aid in reducing the risks linked to regional

Real Estate Investment Trusts, otherwise known
as REITs, serve as an alternative investment
option for those seeking an indirect approach
to invest in real estate properties. These
publicly traded companies possess a diverse
portfolio of income-generating properties
across various sectors.
Property Diversification
Property diversification is one of the main
considerations before investing in REITs. It is
important to look for REITs with a diversified
portfolio across different geographical regions
and property types. The process of diversifying
economic fluctuations or particular property
sectors.
Financial Health
Financial health does not only apply to REITs,
but other types of assets as well. It is crucial to
dive deep into the financial statements of any
company and to examine their debt levels and
liquidity. A robust and healthy balance sheet is
indicative of a stable REIT.

7
02 | What is a dividend?
8 Things You Need to Know about Real Estate Investment Trusts (REITs)
REIT Management
Since its rise in popularity in 2020, many
real estate companies have been offering
their own REITs. Therefore, it is important
to do thorough research on who manages
these REITs. Assess the expertise and past
performance of these real estate companies,
as a competent company can profoundly
impact the REITs overall value.
Occupancy Rate
Since most REITs are composed of
condominiums, commercial spaces, and
offices, it is important to know the occupancy
rate of these properties. A high occupancy
rate suggests that the properties owned by
the REIT are in strong demand, resulting in a
consistent flow of rental income. Conversely,
REITs with lower occupancy rates indicate less
attractive properties and therefore lower rental
income being generated by the management.
Market Conditions and Economic Outlook
Before investing in REITs, it is important to
look at the economy as a whole. The economy
affects different industries in different ways.
During economic recessions, REITs do not only
face the challenge of having low occupancy
rates, but also the challenge of existing
occupants paying rent on time. Having high
vacancy rates and low rental income can
significantly impact the value of the REIT.
Tax Regulations on Dividends
When investing in REITs, it is important to
know the tax implications that come with
them. When you receive dividends as a
Filipino citizen, they are subject to a 10% tax.
Dividend Yield
One of the attractive aspects of REITs is that
unlike physical properties, they are required
to pay annual dividends. REITs are required to
distribute at least 90% of their taxable income
to shareholders in the form of dividends.
8
03 | Dividend Champs & Titans

Dividend Champs and Titans are terms used to describe a special type of dividend-paying stock listed on
the Philippine Stock Exchange (PSE). The criteria for identifying a Dividend Champ and Titan are based
on our research and assessment of the Philippine stock market.

The two most defining criteria for a Dividend Champ and Dividend Titan are that it has consistently
distributed dividends every year and has a record of increasing dividend payouts over a 15-year and
20-year period, respectively. The other criteria include the company’s minimum market capitalization of
₱5 billion during the review of eligible Dividend Champs and Titans and the 15 and 20 years it has been
listed on the PSE.

9
03 | Dividend Champs & Titans

We want to disclose that our initial review for Dividend Champs covers 15 years from 2005 to 2019, and
for Dividend Titans covers 20 years from 2000 to 2019. This action was taken to avoid the effects of the
pandemic, which significantly impacted the financial health of many companies. But looking forward, the
next review will include more recent years as the year ends and we see better growth.

This illustrates the growth of your initial ₱100,000 investment over a 15- or 20-year period when
reinvesting dividends in any of the Dividend Champs. Notably, ICTSI, Jollibee Foods Corp., and SM
Investments Corp. emerge as standout long-term investment options. Over 15 years, SM Investments
Corp. delivered an attractive 12.38% compound annual growth rate (CAGR) and generated ₱53,153.65
in dividends. Meanwhile, ICTSI outperformed with an impressive 27.01% CAGR and ₱1.83 million in
dividend earnings over 20 years.

As a disclaimer, these Dividend Champs and Titans may not necessarily be the best dividend-paying and
performing stocks for dividend investors right now. Our intention is not to assert that these are the only
dividend-paying stocks to consider. Instead, the Dividend Champs and Titans are examples of exemplary
stocks that have consistently provided shareholders with reliable dividends and higher dividend payouts
over a specified period. For a broader selection of dividend-paying stocks with higher yields, you can
utilize the DragonFi Dividend Screener.

10
03 | Dividend Champs & Titans

If we look at ICTSI’s chart, your initial investment of ₱100,000 would have grown to ₱12.18 million at the
end of your 20-year investment period. This is 58% higher than the ₱7.67 million you would have amassed
if you chose not to reinvest any dividends.

ICTSI’s dividend grew an annual average of 22.53% from 2003 to 2022. In 2003, the annual dividend stood
at ₱0.30 per share, while the stock was trading around ₱3.19 per share. Fast forward to 2022, the annual
dividend amounted to ₱5.56 per share, a remarkable 74.29% higher compared to the ₱3.19 share price
in 2003. The dividend yield, relative to the acquisition cost of ₱3.19/share, soared from 9.40% in 2003
to 174.29% by 2022. This accomplishment is nothing short of surreal; the dividend stream distributed by
ICTSI has repaid your initial investment many times over.

To emphasize this point, consider a scenario where you acquired 1 million shares of ICTSI in 2003 at
₱3.19 per share, resulting in an initial investment of ₱3.19 million. In 2003, you received dividends
totaling a respectable ₱300,000. Given the latest annual dividend of ₱8.56 per share, your annual income
in 2023 generated solely from ICTSI dividends is an astounding ₱8.56M! And oh by the way, on Sept
14, 2023, ICT closed at ₱210 per share, 6483% higher than your ₱3.19 per share cost basis. This is what
passive income dreams are made of!

11
03 | Dividend Champs & Titans

As for Ayala Land, Inc., its performance in comparison to ICTSI falls short in terms of both dividend growth
and price appreciation. However, the point is that by reinvesting your dividends, your returns will be
higher than if you chose not to reinvest. At the end of your 20-year investment period, your ₱100,000 has
grown to ₱583,725.00, 19.44% higher than ₱488,700.00. Finally, your cumulative dividend earnings would
equate to ₱97,962.30 compared to ₱88,079.11 if you did not reinvest any dividends.

In the examples illustrated, the dividends were reinvested on the payment date. Furthermore, to account
for the board lot sizes, dividend payments were accrued until they reached the minimum board lot size for
reinvestment.

12
04 | Blueprint for Dividend Stock Selection
with DragonFi Screener

When choosing stocks to include in your dividend

portfolio, you should address three key questions:
1. Is the dividend safe?
2. Is it growing?
3. What’s the return?

13
04 | Blueprint for Dividend Stock Selection with DragonFi Screener
Is the Dividend Safe?
It goes without saying that we want to
invest in financially stable companies that
will provide us with a reliable income
stream for the foreseeable future. Focus
on these 4 key metrics in the DragonFi
Dividend Screener to ascertain dividend safety:
1. Return on Equity (ROE)
Assesses a company’s efficiency in generating
profits in relation to the capital invested by its
shareholders. All else being equal, a company
with a high ROE requires less capital to achieve
the same level of returns as a company with a
low ROE. This enables the firm to expand and
distribute more dividends. Companies that
consistently maintain a high ROE over time,relative
to their industry peers, typically possess what is
known as a sustainable competitive advantage or
an economic moat. This advantage allows them
to mitigate the impact of competition and sustain
returns that exceed the industry norm. Look for
companies with a long track record of achieving
double digit ROEs.
2. Payout Ratio
The portion of a company’s earnings distributed
to shareholders in the form of dividends. As an
example, if the company earnings per share
(EPS) is ₱2/share and it pays out ₱1/share as
a dividend, the payout ratio is ½ or 50%. The
payout ratio serves as a gauge of the margin of
safety. For instance, a 50% payout ratio suggests
that earnings can decline by approximately 50%,
leaving the dividend fully funded. Therefore,
while higher payout ratios often result in larger
dividends, an excessively high ratio leaves little
room for unforeseen challenges. There is also a
tradeoff between a high payout ratio and future
dividend growth. The higher the payout the
less the company retains for growth initiatives.
This explains why REITs historically exhibit
modest dividend growth since they are required
to distribute 90% of their taxable income as
dividends. Outside of REITs, it’s generally advisable
to steer clear of stocks with payout ratios that
approach or exceed 100%. As a rule of thumb,
look for payout ratios below 50%. However,
mature companies that are natural monopolies can
sustain high payout ratios in excess of 50% without
encountering significant issues.
3. Debt to Equity
Measures the proportion of a company’s financing
that comes from debt (borrowed funds) compared
to equity (investor-owned funds). It provides insight
into a company’s capital structure and financial
leverage, helping investors assess the level of risk
associated with the company’s use of debt to fund
its operations and growth initiatives.
4. Interest Coverage
This ratio provides insights into the company’s
capacity to comfortably cover its interest payments
from its operating income. Generally, a higher
interest coverage ratio indicates a healthier
financial position and a lower risk of default
on debt obligations. For instance, if a company
generates an operating income of ₱3 million while
having interest expense of ₱1 million, its interest
coverage would be ₱3M/₱1M, showing that it can
cover its interest expense three times over with its
operating income.
It is important to note that it is appropriate to
compare any financial metric against industry
benchmarks and relative to the company’s own
historical trends. What is considered a high
ratio for one industry may not be the case when
benchmarked versus another industry. Moreover,
a specific ratio in one fiscal year is not as insightful
as one that is compared to a company’s historical
performance.
14
04 | Blueprint for Dividend Stock Selection with DragonFi Screener
Is the Dividend Growing?
Most stocks derive the majority
of their value not from the current
dividend levels but from the
potential for future dividend growth.
A sustained rise in dividends makes
the stock more attractive to investors. In the
short run, stock prices and dividend growth
may appear disconnected. However, in the
long run,for companies with strong economic
fundamentals, dividend growth and share prices
will move in tandem – a correlation that becomes
stronger as time passes. To forecast a company’s
dividend growth potential, pay close attention to
the following:
1. Dividend History
Look for companies with a track record of
consistently increasing dividends over time.
The DragonFi Dividend Screener displays the last
10 years of dividend data.
2. Compounded Annual
Dividend Growth Rate
The screener presents the 5, 10, and 15-year
compounded annual dividend growth rate per
stock. Combined with the dividend history, this
data will help you identify emerging or sustained
dividend growth. Give more weight to recent
data.
3. Earnings Estimates and
Management Guidance
The growth of dividends relies on the company’s
ability to consistently generate earnings. As a
dividend growth investor, stay informed about
the company’s fundamentals by following their
earnings announcements and reading DragonFi’s
research reports.
15
04 | Blueprint for Dividend Stock Selection with DragonFi Screener

What’s the Return?

This part gets a bit complicated, but we encourage you to power through as we prepared a
shorthand method to simplify its application. To arrive at the return that we will require for
our investment, we turn to the most popular method for valuing dividend paying stocks, the
Gordon Growth Model.

On the most basic level, the Gordon Growth Model computes the maximum price or the fair value of a
dividend paying stock given its current or projected dividend, the stock’s required rate of return and the
projected long term sustainable dividend growth rate.

Its formula is as follow:

Price of a Stock= Dividend/(Required Rate of Return – Dividend Growth)

Doing a little bit of algebra, we derive the following:

Required Rate of Return= Dividend Yield + Dividend Growth

Dividend yield represents the percentage of dividends a company pays relative to its stock price. The ideal
dividend yield falls within the range of 4% to 7%. Yields higher than this range often prove unsustainable
and may signal deteriorating company fundamentals, which are reflected in a declining share price.

Conversely, when yields are lower, in the range of 1 to 3 percent, the stock becomes heavily dependent
on dividend growth to meet our required rate of return.​You can find the Dividend Yield (TTM or Trailing
Twelve Months) in the Dividend Screener.

When seeking a return on your dividend stock, it is advisable not to settle for anything lower than the
long-term average return of the Philippine Stock Exchange Index (PSEi). For the PSEi return, we will
use 9% as a proxy for the market return as different 20 year periods from 2000-2022 have yielded a
compounded annual growth rate of anywhere from 8.13% to 10.21%. However, our goal is to outperform
the PSEi; otherwise, we should simply invest in the entire PSEi instead of attempting to pick individual
stocks.

To account for this, we incorporate a margin of safety,

essentially requiring a higher total return for our investment.

Dividend Yield + Dividend Growth = Total Return + Margin of Safety = Required Return

In other words, Required Return = PSEi Return (9%) + Margin of Safety.

16
04 | Blueprint for Dividend Stock Selection with DragonFi Screener

Below is a sample template that you can use to help you determine the required return,
which we will then use to arrive at the appropriate price to pay for our dividend-paying security.

Remember we fixed the the sum of the Dividend Yield (1st Column) and the Dividend Growth Rate
(2nd column ) at 9% (3rd column), which represents the approximate average long term returns of the
PSEi. We then add the margin of safety (4th column) to embed our higher total return requirement.

Notice that for stocks with dividend yields of 4%-7% (the sweet spot), we only applied a margin of safety
of 1%, reflecting the lower inherent risk associated with stocks in this yield spectrum. However, for stocks
whose yields find themselves on the opposite ends of the sweet spot, we increased the margin of safety
accordingly.

It’s worth noting that every individual investor has their own unique risk profile. If you lean toward a more
risk-averse approach, you have the flexibility to increase the margin of safety according to your preference.

17
04 | Blueprint for Dividend Stock Selection with DragonFi Screener

Real World Example: Globe Telecom

Now we are ready to take the above concept for a test drive with a real-world example. Let’s say you took
a look at your DragonFi Dividend Screener and was attracted to Globe’s current Dividend Yield of 5.71.

Taking a look at the dividend history of GLO, you
also projected total dividends for the fiscal year
2023 to end up at ₱100/share. In addition, given
the 5yr, 10yr, and 15yr dividend growth rate of
GLO and your analysis of the company’s other
fundamental drivers, you estimate GLO’s long term
sustainable dividend growth rate to be roughly
around 3.5%.
You astutely point out that the sum of GLO’s
dividend yield of 5.71% and dividend growth rate
of 3.5% is below the 10% minimum required return
for stocks whose yields are between 4% to 7% (see
Required Return Table above).
You may be wondering: What price should I be
willing to pay for GLO, considering my required
rate of return is 10%, and I anticipate that GLO
will be paying ₱100 per share in dividends this
year and sustaining a 3% dividend growth rate
indefinitely?
You calmly whip out the DragonFi Price Finder
(Gordon Growth Model Calculator), and you input
the aforementioned figures and the Price Finder
arrives at a price of ₱1538.46 per share, 12.2%
below the current market price of ₱1752 as of
September 18, 2023.

18
04 | Blueprint for Dividend Stock Selection with DragonFi Screener

Benefits of this Stock Selection Strategy

Screening for dividend growth stocks with the methodology described above has several advantages:

1. It imparts discipline and fosters effective risk management within the investment process. In the
above real-world example, it would have definitely kept you out of Globe’s 51.29% decline from its
November 24, 2021 high of ₱3611. Why is this a certainty? Because the dividend yield at higher
prices would have been much lower (2.94% at P3611), forcing you to increase the required return
figure. At the same time, the 5 and 10-year dividend growth rate at that point in time would not have
been appreciably higher than our 3.5% estimate.

2. By assessing stocks based on safety, growth, and return, the investor gains a holistic view of the
investment opportunity.

3. The flexibility of the model allows it to accommodate investors with varying risk profiles. More risk-
averse investors can simply increase the margin of safety, thereby raising the required rate of return.
Similarly, we can mitigate uncertainty surrounding our growth estimate by adjusting the margin of
safety input.

It’s important to note that while Gordon Growth Model is a potent tool, it is not a silver bullet
(because there is no such thing). Treat the Gordon Growth Model as just another data point in the
investment process.

19
05 | Putting It All Together:
The Dividend Harvest Strategy

Establish Nurture Harvest

The Dividend Harvest Strategy aims to establish, nurture, and harvest a stream of income through
high-quality dividend-paying securities. It shifts the attention from stock price volatility, appreciation,
and capital gains and instead focusses only on the dividend stream its size, its safety, and its growth.
The dividend stream and not price appreciation becomes the paramount reward and success benchmark.

Establish
Your Portfolio

Research
The first and most critical step in your passive income journey is thorough research. Begin by
following the Blueprint for Stock Selection process outlined above.

1. Use the Dividend Screener to identify stocks with the right balance of yield and growth.
• Filter for stocks with a Dividend YIeld (TTM) of 4%-7%. The Sweet Spot!
• Verify that the company has a history of consistent dividend payments.
* The Dividend Screener displays 10 fiscal years’ worth of dividend data per stock.
* Check the 5, 10, and 15 year Dividend Growth Rate. Look for firms that increase their
dividends at a healthy pace.
• Ensure that the fundamental drivers of dividend safety, such as Return on Equity, Interest Coverage
Ratio, Debt to Equity, and Payout Ratio are in place.

2. Evaluate the company’s fundamentals.

Check DragonFi’s company-specific research where we will detail the company’s dividend prospects as
well as the overall fundamental drivers of the company.
• Visit the investor relations site of the specific company where you can listen to analyst briefings and
read corporate disclosures and management commentary regarding the firm’s fundamental health.
• Efficiently examine the company’s fundamentals in the DragonFi stock page. Here you will be able
to dive deeper into the company’s financial and valuation metrics, providing valuable insights into a
stock’s suitability for your portfolio.

3. Use the Dividend Screener’s Price Finder to arrive at a fair value for the stock.
• Estimate the expected dividend, required return, and dividend growth of the stock and input the
figures into the Price Finder.
• Instead of a single price, perform a sensitivity analysis using varying figures for the required
return and dividend growth to establish a price range. To see how to do this, refer to the example
provided for Meralco in the Stock Picks section.

4. Create a list of potential names along with their corresponding actionable price ranges.

20
05 | Putting It All Together: The Dividend Harvest Strategy

Establish Your Portfolio

Execution
1. Time to deploy capital.
You’ve done your research. Now it’s time to keep your eye on the prize. Once a stock in your
opportunity set reaches an actionable price, buy in tranches. Don’t feel obliged to put all your money
to work overnight. Holding onto cash while conducting further research or waiting for more favorable
prices often results in better decisions. In one of our stock picks, that will be detailed at the tail end
of this book, Jon performed a sensitivity analysis on AREIT and arrived at an actionable price range of
P24 to P31. In such a scenario, you may choose to deploy 25% of the allocated funds for AREIT in four
tranches as the stock price declines.

2. Diversify your portfolio.

Aim for a well-diversified portfolio by investing in different industries and sectors. We can’t emphasize
enough the importance of diversification in managing risk. Over allocation in one industry makes you
susceptible to the common economic forces among the stocks within the same industry or sector.
Target at least 5 dividend growth stocks in the short term (1-3 years) and attempt to increase this to
10-15 within 3-5 years.

Nurture
Your Portfolio
1. Regular Contributions
Build your investment portfolio over time. Patience is key in dividend investing. Regular contributions
allow you to steadily build your investment portfolio over the years. Even with modest contributions,
your investments can accumulate into a substantial portfolio over time.

2. Reinvest Dividends
Harness the power of compounding by reinvesting cash dividends. By purchasing shares of stocks that
meet the stock selection criteria with your dividends, you benefit from the magic of compounding.

3. Monitor your portfolio

Regularly monitor your existing holdings using the same dividend safety and growth criteria that we
described earlier in the book. Is the dividend rising at least as fast as you originally anticipated? Are
the dividend safety metrics improving or deteriorating? We recommend keeping tabs of your portfolio
companies’ quarterly earnings report to evaluate their financial standing.

4. When to sell, When to swap

• Sell when dividend safety is potentially impaired. By now you know the drill. Check the Dividend
Screener for the stock’s ROE, Interest Coverage, Debt to Equity, and Dividend Payout for signs of
deterioration.
• Swaps fall into two camps.
* Can I trade up in yield? Can I purchase a stock with a higher dividend yield with the same
dividend growth prospect?
* Can I trade up in growth? Can I purchase a stock with the same yield with a higher growth
prospect?

As you accumulate more shares over time, your dividend income grows, and you may also see potential
capital appreciation.

21
05 | Putting It All Together: The Dividend Harvest Strategy

Harvest

The timing of dividend harvesting is a matter of personal preference. Some investors prefer to enjoy
the fruits of their investment early in life. However, it’s important to note that this approach reduces the
compounding effect of one’s investment. Our recommended strategy is for investors to reap the benefits
of their dividend income during their retirement years when their income capacity typically diminishes or
disappears.

06 | Stock Picks

Jon Carlo Lim

DragonFi CEO & Co-Founder

Manila Electric Co. (Meralco)

Fundamentals

Economic Moat/Sustainable Competitive Advantage

1. Meralco holds a monopoly as the stole electric power distributor in Metro Manila with a franchise area
of 9,685 sq km, accounting for 55% of the country’s electric output.

2. Meralco’s high ROE allows it to use less capital to produce a specific level of earnings, enabling growth
even at high payout ratios.

22
06 | Stock Picks

Jon’s Stock Picks

Dividends

Meralco’s dividend history reveals a robust pattern of consistent growth over the past 5, 10, and 15 years.
Additionally, given the prevailing power challenges in the country, it is highly plausible that Meralco will
exhibit growth above 6% for the foreseeable future. Furthermore, consensus EPS estimates point toward a
positive outlook, suggesting the potential for either dividend growth or the stability of dividend payments.

Technicals
According to the sensitivity analysis table,
Meralco is attractive even at its current levels.
With a conservative dividend per share estimate
of ₱18.42, a 15.5% decline to ₱307.00/share
from ₱363.00/share last September 11, 2023,
would imply a dividend yield of 6%. Additionally,
a potential long-term dividend growth rate north
of 5% would represent an opportunistic entry
point. Therefore, I consider Meralco as a buy
between ₱307.00/share and ₱368.40/share.

23
06 | Stock Picks

Jon’s Stock Picks

AREIT, Inc.
Fundamentals

I just wanted to briefly touch on AREIT to expound on the dividend characteristics of a typical REIT. REITs
are an alluring investment vehicle because they allow investors to invest in real estate without the sticker
shock of purchasing real property outright. The asset class often offers a high yield because REITs are not
taxed at the corporate level as long as they distribute at least 90% of their taxable income as dividends.
However, it is also on account of this that REITs feature moderate dividend growth. Noticed how Dividend
Per Share Growth ( DPS Growth) for AREIT, quickly levels off after each round of property-for -share swap
This aligns with the average dividend growth rate of REITs in the US from 1972 to 2019, which typically
ranged between 4-5%. You won’t typically see the extraordinary 20-year average dividend growth rates
of 22.53% achieved by companies like ICT from 2003 to 2022. This isn’t to say that I don’t appreciate the
overall dividend profile of AREIT. It undoubtedly has significant growth potential, thanks to the superior
property portfolio provided by its sponsor, Ayala Land.

24
06 | Stock Picks

Jon’s Stock Picks

Technicals

However, I would caution against overloading your dividend portfolio entirely with REITs solely for their
high current income. Remember that future value appreciation is often tied more to dividend growth than
current yield. For investors with a long-term time horizon, it’s advisable to maintain REITs at around 20%
to 30% of your dividend portfolio. For individuals nearing retirement, increasing the allocation of REITs in
your portfolio can provide higher current income.”

Specific to AREIT, I conducted a sensitivity analysis with different dividend growth and required return
combinations and arrived at an investable price range between $24.11 and $31. I plan to enter the market
gradually as AREIT trades within this price band, buying more of my target allocation as it declines.

25
06 | Stock Picks

Alexis Cabel
DragonFi Research Head

Aboitiz Power Corp. (AP)

Fundamentals

The charts above display Aboitiz Power Corp.’s remarkable performance.

1. A 5-year CAGR ttm 2023 revenue growth of 10.6%, outperforming the

Philippine GNI 5-year CAGR of 5%.

2. A 29% surge in Gwh sales in H1-2023 compared to H1-2022.

3. A ttm 2023 ROA at 7% and ttm 2023 ROE at 20% that

exceeds the 5% and 15% benchmark, respectively.

4. A current ratio 1.6x and a net debt-to-equity ratio of 0.93x as of H1-2023.

At the current share price of ₱33.75/share, it is trading at a 20% discount

relative to its market valuation of ₱42.37.

26
06 | Stock Picks

Alexis’ Stock Pick

Economic Moat/Sustainable Competitive Advantage

1. Electricity is a basic need.
2. AP has a stable mix of various power capacities from Luzon, Visayas, and Mindanao.
3. It has 81% of baseload power from coal and oil to pursue renewable energy
4. It contributes 18% of Philippine power capacity.

Dividends
AP has a dividend policy of distributing 50% of its previous year’s income as cash dividends to common
shareholders. With the stock price of ₱33.75/share, the ttm 2023 dividend yield stands at 5.6%. Looking
ahead to the estimated cash dividend on the ex-date in March 2024, which is projected to be ₱2.23/share,
the yield at the stock price of ₱33.75/share would rise to 6.9%. That surpasses the PH10YTN of 6.5% and
is close to the 7% average dividend yield of Philippine REITs.

27
06 | Stock Picks

Marvin Germo
Renowned Financial Educator

Citicore Energy REIT Corp. (CREIT)

When it comes to evaluating REITs, I ask myself 5 questions. These questions serve as essential checks to
assess whether a particular REIT is a promising investment opportunity.

What is the long-term outlook in the sector?

I believe renewable energy is here to stay, with growing demand expected in the years ahead.
Additionally, as the Philippines undergoes further development, energy demand will persist. CREIT
remains resilient, unaffected by POGOs, BPOs, or shifts in the retail market. Since its initial public offering
(IPO), CREIT has increased its gross leasable area (GLA) from 1.65 million sqm to 5.96 million sqm, which
consists of geographically diverse assets from Luzon to Mindanao.

Who are the tenants?

28
06 | Stock Picks

Marvin’s Stock Pick

How long are they staying?

How good, stable, and predictable are the earnings?

CREIT implements a rent escalation strategy, averaging 10-12% every 5 years. Notably, its net income has
surged from P225.88 million in 2021 to a robust P1.25 billion in 2022. Furthermore, CREIT demonstrated
growth in both Q1 and Q2 of 2023 when compared to the same periods in 2021.

What dividend yield am I getting?

In 2022, CREIT distributed an annual dividend of P0.167/share and is expected to grow to P0.189/share
at the end of 2023, assuming the Q4 dividend is at P0.049/share. With a stock price of P2.59/share, this
translates to a 7.29% dividend yield for the current year. While the yield remains comfortably above my 5%
threshold, it’s worth noting that the stock has been consolidating near its recent high for some time now.
The best and cheapest time to acquire it would have been several months ago.

29
06 | Stock Picks

Franco Fernandez
DragonFi Research Associate

International Container Terminal Services, Inc. (ICTSI)

Fundamentals

ICTSI’s profitability has significantly improved since the reopening of the economy, with net income
reaching P31.09 billion in 2022. Furthermore, the high ROE suggests that ICTSI possesses an economic
moat or competitive advantage.

Economic Moat/Sustainable Competitive Advantage

1. ICTSI is the world’s largest independent terminal operator across 6 continents.

2. Its port partnership agreements cover long-term concessions of an average of 25 years.

3. ICTSI’s current 34 terminals across 20 countries create a network effect, attracting shipping lines
and clients due to its established global presence.

30
06 | Stock Picks

Franco’s Stock Pick

Dividends

ICTSI’s increasing free

cash flow (FCF) indicates
the completion of its
capital investment
cycle and provides an
assurance and protective
cushion for dividend
distribution and growth.

Over the last 20 years, ICTSI has demonstrated robust dividend growth. Impressively, they have
maintained a consistent dividend distribution since 2005, without any reduction in payout since then.

Based on the sensitivity analysis table, I believe ICTSI can be considered as a conservative buy between
P140.61/share and P168.24/share. Notably, P168.24/share is within a significant support area when you
look at its price chart.

31
Investing Club

Want to see passive income investing in action?

DragonFi will be launching the Investing Club where we will be managing
a real money model portfolio employing the Dividend Harvest Strategy.

We will be explaining each of our portfolio actions step by step,

expounding on the rationale and research behind every investment.

Follow along or even invest side by side with us as we

help you in your passive income investing journey!

Open an account and watch out for our

launch this October 2023.
Start your passive income
investing journey with

Start investing in dividend stocks

in as little as 30 minutes!

Open an account with DragonFi

STEP 1 at www.dragonfi.ph/register

Fund your account using

STEP 2 Instapay, PESONet, Bills Payment

Start investing by buying

STEP 3 your first dividend stock
Meet new friends, share insights,
and gain more knowledge with
our growing community.
DragonFi Investors HQ (Official) FB Group
www.facebook.com/groups/dragonfihq

SCAN TO JOIN
Follow DragonFi in our
Official Social Media Channels:

facebook.com/dragonfihq

@DragonFiHQ

linkedin.com/company/dragonfi