New tax brings dividends

DONALD Trump’s win in the US presidential election has led many investors in the region to seek the safety of dividend paying stocks.

Unsurprisingly, their safe harbour has been the Singapore stock market.

The benchmark Straits Times Index has outperformed all other regional indices since early last month, rising by some 7% while other regional benchmarks have been generally lower.

Much of the money would have flowed into the 41 real estate investment trusts, the property trusts, major corporates and bank stocks on the exchange.

It was maybe an opportunity the local exchange missed.

Retail investors in Malaysia would have expected a higher dividend payout from Corporate Malaysia, based on the strong earnings growth of about 10% for the FBM KLCI and 13% for the FBM100 at the end of November.

Some would also have been hoping for special dividends ahead of the imposition of the new 2% tax on dividend income above RM100,00 next year, as announced under Budget 2025 in October.

It has been hit-and-miss on this front.

With just a little over two weeks to the end of the year and the new tax coming into force, a handful of companies appear to have decided that a penny saved is a penny earned for its shareholders.

According to Bursa Malaysia filings, 26 companies have declared special dividends since Oct 18, when the new dividend tax was announced.

These include names like Pecca Group Bhd, Superlon Holdings Bhd, Magni-Tech Industries Bhd, LBS Bina Group Bhd (after six years) and Tambun Indah Land Bhd. They are among some 260 companies that declared interim dividends following the third-quarter (3Q) earnings season.

Names like MBM Resources Bhd, Chin Teck Plantations Bhd and Bermaz Bhd have also declared special dividends, but these companies have a legacy of doing so.

Although statistically difficult to correlate, the new dividend tax may have led companies like Eastern & Oriental Bhd to offer a special dividend after some 16 years. Glove maker Hartalega Holdings Bhd is another example.

Others seem to have increased the payout rate due to improved earnings performance. Sarawak-based Ta Ann Holdings Bhd is a case in point.

The Main Board-listed plantation company, although cash rich and controlled by a couple of major individual shareholders, did not announce a special dividend.

However, it has raised its dividend payout rate to 92% of earnings in the nine months ended Sept 30, 2024 (9M24), compared to 74.7% in 9M23 and an average of about 50% for earlier years.

Elsoft Research Bhd, which announced a one sen special dividend last year, has not declared a special dividend ahead of the new tax but has raised its interim dividend to two sen from one sen last year.

Like Elsoft, most of the companies that announced dividends made sure the payment date was before or by Dec 31, 2024, done very likely to avoid the new tax.

With Dec 31 a little over two weeks away, there is still time to announce and pay out some money to shareholders.

The dividend tax is a tax imposed on the high net individuals with less of an impact on mass retail investors.

By assuming an average 4% dividend yield, only those who invest above RM2.5mil in capital will be subject to the tax, according to analysts.

Since the new tax applies to dividend returns for individual investors and investments in mutual funds and not to dividends of institutional investors (both foreign and local) like Employees Provident Fund or Permodalan Nasional Bhd, many of the big regular dividend players like banks have not made significant changes to their payout routine.

Nixon Wong, chief investment officer at Tradeview Capital Sdn Bhd, said the tax may have encouraged companies like Kossan Rubber Industries Bhd, Malaysia Smelting Corp Bhd, Pecca and a few others to increase their pay out compared to their track records.

He is still expecting companies with major individual/family shareholders to declare higher dividends, but said this could just be a one-off exercise prior to the new tax regime.

The question that arises now is how the dividend tax would impact investors’ action and dividend announcements in 2025.

Could investors, for instance, opt for growth stocks or companies that look to build up cash positions, or could lower interest rates lead to more cash moving into equity?

“Some income seekers tend to trade in usually small-mid cap stocks that are either family- owned businesses or low free-floats, such as majority share base owned by related parties.

“However, I believe the focus may still be growth-centric investment to drive capital growth, essentially focusing more on earnings prospects in the small-mid cap space.”

The overnight policy rate is expected to remain stable, hence, dividend yield stocks may not be particularly in focus, Wong says.

“However, as the market has reacted negatively post a not so great 3Q resulte season, it’s a good buying opportunity for investors to bottom fish some solid growth stocks,” he tells Starbiz 7.