Stock markets of the world, especially the Malaysian/Singaporean market, are not readily predictable. They can collapse so easily into a "bear pit" with little warning.
If we wish to protect our hard earned capital, we must be defensive in our investment approach.
One of the best defence is to buy shares with reasonable dividend yield (i.e. a yield of between one-third to half of the expected long run deposit interest rate).
If we buy a share becasue it pays a reasonable dividend, our loss is likely to be small even during periods of sharp market decline.
For example, we can buy a share which pays 30 cents dividend at $5.00 a share and this gives us a dividend yield of 6%. If the marekt goes into a sharp decline, the amount this share can fall to is limited by the fact that it pays a 30 cents dividend. If the price is to fall as low as $3.00, it will be giving a dividend yield of 10% which is an excellent return compared to what one can get from fixed deposit and with the additional opportunity to capital gain thrown in.
Most people can see that at that price, the share is probably a good bargain and it is therefore unlikely to fall lower. From experience, a dividend yield of 10% seems to be the floor below which most stocks will not drop.
In sharp contrast, shares which pay low or no dividend at all do not seem to have any bottom and price decline can hit 90% or more.
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