Are Dividend-Paying, Low-Volume Stocks Worth Investing In?

Lately with the volatility in the markets, be it in US stocks, SG stocks and even commodities like gold and silver, I found a different performance in a selective group of stocks, some of which are in my portfolio.  This group refers to the dividend paying stocks with low average trading volume.  Their somewhat stable performance (largely due to low trading liquidity) is a total opposite of the all time highs and corrections the overall markets have been experiencing recently.  This makes me wonder, are dividend-paying stocks with low trading volume good for long-term investors?

On the surface, they somewhat appear attractive with steady dividends, conservative management, and valuations that seem cheaper than the popular blue chips.  However beneath the calm surface, the lack of liquidity and market interest can hide some uncomfortable truths.

First and foremost, by “low trading activity”, I am referring to stocks that trade below SGD 1 million in average daily trading value.  Many of these counters see only a few tens of thousands of shares changing hands each day.

Two such names that come to mind are Hong Leong Finance and Kimly Limited.  Both have rewarded shareholders like myself with regular dividends over the years, yet they hardly feature on the top-volume list on SGX.

1)     Hong Leong Finance

Hong Leong Finance is one of Singapore’s oldest finance companies, a conservative lender that focuses on traditional banking and SME loans.  It does not attract the same hype as DBS or OCBC, but its dividend history is surprisingly solid.

-     Average trading value: ~SGD 700,000/ day

-     Dividend yield: ~5.5% 

-     Dividend consistency: Strong track record over many years

-     Business nature: Financial services including deposits, loans, and SME financing

2)     Kimly Limited

Kimly, one of Singapore’s largest coffee shop operators, manages heartland food outlets and stalls.  It has distributed cash dividends consistently, with yields hovering around 5 % in recent years.

-     Average trading value: ~SGD 90,000/ day

-     Dividend yield: ~5.4 %

-     Business nature: F&B retail management, stable but margin-sensitive

Why Investors Might Be Attracted

1)     Attractive Dividend Yields

Since these stocks do not attract hot money, they often trade at lower valuations.  That means higher yields for the same level of profitability.  A 5% yield from a small company with clean books can look appealing when bank deposits barely pay 3%.

2)     Potential for Mispricing

When few analysts or institutions cover a stock, pricing tends to be inefficient.  A patient retail investor who does their homework might uncover value before the market catches on.

3)     Stability and Local Familiarity

Many of these businesses are familiar names in Singapore - think of Kimly coffee shops in the heartlands.  They serve everyday markets, often with stable recurring revenue.  In the longer term, due to the lack of trading interests from retail investors, their share prices are rather range-bound.  This makes them acting like bonds.

4)     Lower Correlation with the STI

Small counters often move differently from blue chips.  That can add diversification to a dividend portfolio that is otherwise dominated by banks and REITs.

Some Serious Drawbacks

1)     Liquidity Risk

The most obvious concern is liquidity.  With average daily trading values below SGD 1 million, investors may face wide bid-ask spreads.  Selling a meaningful amount of shares can move prices down, especially during market stress.  Investors might own a “good” business but find it hard to exit when they need to.

2)     Limited Transparency

Small, thinly traded companies often lack analyst coverage.  Updates come only during quarterly reports or SGX announcements.  Investors will need to monitor them personally.  For instance, Kimly’s margins recently came under pressure from higher costs.  This is information that did not immediately attract much market attention.

3)     Dividend Fragility

While past dividends are encouraging, smaller firms have narrower cash buffers.  A single poor year or regulatory change could force a dividend cut.  Hong Leong Finance, for instance, cut its dividends by 32% in its FY2024 reporting due to lower net income, which was a let-down from their spectacular performance in FY2023.

4)     Governance and Free Float

Many of these firms have high insider ownership and small free floats (Kimly’s is around 31 %).  This can mean aligned interests, or less accountability, depending on how management behaves.

5)     Opportunity Cost

When you tie up money in illiquid counters, you sacrifice flexibility.  That same capital could have gone into more liquid dividend stocks or REITs where you can reinvest or rebalance more easily.

My Reflection - Weighing the Trade-offs

So, are such stocks “good” or “bad” for dividend investors like myself?  Personally, I do not think it is that straightforward.  They are not inherently bad, but they are not universally good either.  If you are a long-term investor collecting dividends and do not mind holding illiquid positions, and do not get upset because you miss out the potential multi-baggers in the other growth stocks, these could be fine as satellite holdings, which are small percentage allocations that complement your core dividend portfolio. However if you expect flexibility, fast exit, or consistent price discovery, they may not fit your style.  The key is to treat low-liquidity stocks as supplementary yield boosters, not the foundation of your income portfolio.

As someone working toward Barista FIRE, where dividends play a central role in covering daily expenses, I have come to see that not every dollar of dividend income is created equal.  A 5% yield from a thinly traded counter may look good on paper, but if the business stumbles or I cannot exit easily, that “income” could come at a huge opportunity cost on capital.

That said, I also appreciate the diversity these counters bring.  They remind me that income investing is not only about numbers, it is also about understanding the risk behind each yield.  To me, having some of these companies in my portfolio, especially when the management has aligned interests with a substantial shareholdings, they help as dividend boosters and diversifiers in my portfolio, especially when the companies are fundamentally doing well.

For my own plan, I will continue to hold a few of these low-volume names, but only as a small part of my portfolio that prop up the portfolio’s yield, while my core income base remains anchored in larger, more liquid dividend payers like banks and REITs.  In conclusion, position sizing matters.  Barista FIRE, here I come...!