Passive Income continued to grow in 2023!

My dividends continued to grow in 2023 at a healthy pace. I achieved FI in 2021 but it is nice to have extra funds to set aside for future 'retirement projects' such as charitable work.

Despite having extra funds, I am happy with my current condo so I am not tempted to jump on the property upgrading path. 

As I mentioned before, some of my friends have 'upgraded' to landed property but that was their "passion project" because they wanted to build and design something that they could call their own. So the journey in designing and building their dream home was a crucial part of the experience. I honestly don't have the time or inclination (or diligence) to undertake such a project at my stage of life. 

 

2023 Return - 10% target achieved!

 

The year has finally ended and my 2023 IBKR portfolio return is 14.68%. At the start of the year I set a target of 10% in order to erase my 7%+ loss in 2022 plus a little bit of gain. I am glad that I achieved it. Even though I 'lost' to S&P500 which returned 24%, I am still content because my portfolio is rather Europe and UK weight and I managed to beat both benchmarks.

According to CNBC:

FTSE 100: 3.64%

Euro Stoxx 600: 12.64%

As FTSE 100 is one of my largest holdings its underperformance definitely dragged me down. Fortunately, there was a mini rally in the financials sector so that helped my portfolio a lot. 

Christmas!

 

Warning: This post is not related to investing. 😄

I always had an interest in photography and my current Canon DSLR is already 8 years old. I decided finally to get a replacement. I occasionally do visit camera review websites and the sensing I got was that Sony had pulled ahead of Canon with their constant line of Alpha 7 models. The Alpha 7 Mk IV (released in 2021) seemed to be the model to get even if it meant 'relearning' a new camera brand.

Then in 2023, the equation changed with Canon's release of the R6 Mk II, which is one of their low to mid-range models. Apart from it being 1 year newer than the A7 Mk IV and thus having a slight technological edge (eg: in video), I think it shows that Canon is able to learn and catch up with Sony. I think it occupies an ideal price point with the R5 and R3 costing a lot more for more 'pro' video features. Unlike the old days when the more expensive cameras had clear advantages, the gap between midrange cameras and their professional brethren has really narrowed.

I am grateful that my employment income and passive income allows me to pursue my interests. In 2024 I would like to travel more and take more photos.

I hope you will be able to give yourselves some sort of 'treat' for surviving 2023! Have a Blessed Christmas!

Even Bond ETFs are Rallying

 

I posted earlier this year about my interest in Investment Grade US$ Corporate Bonds because of their attractive 6%+ YTM. As part of my asset allocation strategy (eg: buy both equtiies and fixed income), I added to my LQDE holdings and also dipped my toes into ID28.

My only regret of course, is that I did not buy more. Prices of Bond ETFs have rallied and the current YTM for ID28 has plunged from 6.09% to 4.90%. I have no plans to add to my holdings at these yields so my fixed income will be solely T-bills for now.

Earlier Posts for reference:

BuyafterCrash: Trying iShares 2028 Term Bond ETF ID28

BuyafterCrash: Time to go for Corporate Bonds?

Christmas Rally

 

It took some time to arrive, but with the Fed indicating 3 rate cuts in 2024, the Christmas rally is upon us. 

Portfolio Update: Dec 2023

 

Thanks to a rally in share prices, Aviva and Comfort Delgro have gone back to the large category.

Capitaland Ascott Residence Trust went to large category because I was accumulating shares after their disastrous undersubscribed rights issue.

In the medium category, I accumulated more Frasers Logistics Trust because I think its a worthwhile long term holding and also I want to balance out my holdings in Hospitality Trusts. 3010.HK ETF went up to Medium as a result of regular FSMOne RSP.

Fingers crossed: >10% return in 2023?

 

BuyafterCrash: IBKR Portfolio Performance 2022

BuyafterCrash: Welcome 2022

As the end of the year approaches, I am keeping my fingers crossed that my IBKR portfolio return will hit my target of 10%. At the moment, its 12.5% but anything can happen. This will erase my 2022 losses and preserve my 2021 gains.

I have again underperformed Vanguard World, but since 50% of my investing in 2023 was World ETFs, I at least captured some of the gains.

Comfort Delgro : Price Recovering?

 

Comfort Delgro was one of my larger holdings until the price crash caused it to fall into the medium category. Thanks to the recent price rally, it has gone back to the large category and I will be updating my portfolio page soon.

With higher interest rates, companies that are 'nett cash' like CDG are looking more attractive than companies with massive debt servicing costs. On the other hand, Singtel also has a strong balance sheet but isn't doing too well because its path to growth is not as clear. It is 'easy' for CDG to buy bus and taxi companies/bid for routes because a small bus company doesn't cost that much. But for Telcos, you have to go big or go home when it comes to acquisitions.

While I had made one lucky purchase at the absolute bottom at $1.03, I started buying from $1.22 downwards so I 'averaged down'. If you go to the internet, you will see people saying that they will buy after CDG drops below $1. So I guess in the end they didn't buy since it sharply rebounded.

I stuck with my usual philosophy. I analysed and valued the stock at $1.30, and let it drop a bit for 'margin of safety' then started averaging down from $1.22 to $1.03. I know I will never buy at the absolute bottom so averaging down has worked for me, sort of.

Now I am waiting for Capitaland Ascott and Singtel to recover 😎

Dividends Collected: Nov 2023

 

Year is almost over. My dividend growth for 2023 looks to be >20%!

SSB T-Bill Cash Strategy

 

I have redeemed a $13.5k 2.9x% SSB this month in order to apply for the upcoming 3.4% SSB which is really attractive to me. 

However, I wouldn't redeem my 3.1% SSB to apply for this because the interest rate gap is smaller, there is a $2 redemption fee, and more importantly, the risk that an overly large application may not be fully allocated. I think $20k or thereabouts is pretty safe but if too may people apply, there have been previous cases where the allocation was closer to $10k.

Strategy

As the 3.4% SSB provided an opportunity for me to review my cash/cash-equivalent holdings, this is probably a good time to summarise my strategy. Cash-equivalents are generally seen to be highly liquid holdings and while there are technical definitions out there, I adopt my own informal definition. 

SSBs, which can be redeemed in about 2 weeks are cash-equivalents to me. The T-bill ladder I have is 'liquid' insofar as I can have access to $10k a month.

6 month T-bills: Cash bond ladder with $10k maturing each month. Total value: $120k

1 year T-bills: Cash bond ladder with $10k maturing each time. Total value $40k

SSB: $200k (Cash and a little bit of SRS)

Bank Account: cash float for monthly expenses, bill payments, etc.

Gold+Silver: I also have a collection of Gold and silver bullion, with the bulk of the value being in Gold bullion as Gold will keep on shining while Silver could oxidise ('milk spots'). I keep them in a low humidity dry cabinet but thats no guarantee where silver is concerned. 

Gold Bullion if valued at spot prices is pretty liquid. I can sell gold bullion at spot faster than I can redeem a SSB, for example. However, this would only be for emergencies as a fairer value is more like the midpoint between UOB bid-offer price for Gold. But it will take longer to liquidate above spot

 

Planning for additional spending

One of the benefits of having a reserve in cash or cash equivalents is peace of mind that you can cope with expenditure volatility, which is something covered in a recent blogpost by Kyith from Investment Moats.

However, one should not overreact and think that one day, you will encounter a need to have immediate access to your cash, and you are given no time to liquidate. Kyith cites a T Rowe Price study which talks about roof repair which may be a sudden expenditure. As a condo resident, I'm glad I don't have to maintain a roof, but Singapore's weather is not as extreme as US or even Australia, where roof damage due to weather are more common (not just Tornadoes or Cyclones).  However, its good to know that home insurance does cover damage due to extreme weather.

Anyway, back to the point about additional spending. The good news, TL:DR is that the study suggests that most of the expenditure volatility came from housing expenses which does not affect Singapore as much. We have a lower incidence of housing damage due to bad weather and fire than the US (though with all the news about battery fires it makes me wonder if we are catching up). Not to mention that most of us don't live in landed.

Finally, I suspect that most of the expenditure volatility is predictable. For example, Condos 'predict' that some sort of maintenance/ repair work will be done from time to time, and they may even have a schedule, so they collect S&C,, contributions to sinking fund, for this to be done. If the houseowner doesn't create his/her own sinking fund for the purpose of such maintenance/repair, then its on him.... there is nothing magical about landed, it needs repair/maintenance just like condo and HDB.

If I have upcoming predictable expendtiure, such as needing to change my car (since I just bought a car, not so soon), or maybe a major home renovation. I may start adding more to my T-bill holdings to take this into account.

Oct-Nov Investments

 I bought the dip in end October and early November, picking up LLOY, LGEN, VWRD, VUSD, GSK, IOZ, VDPX, VHYD. Thats 2 individual stocks and 6 ETFs by the way. 😄

For Singapore market, the only counter I purchased was FLCT. I mentioned previously that I decided that any counters that I planned to hold for the long-term, I should even enough conviction to accumulate at least $50,000. I took a hard look at my SG REITs and noticed that FLCT had not reached $50k valuation yet. So I bought 7000 FLCT @ $1.05 using FSMOne. The flat $8.80 commission makes it better than SCB's $13.23 commission (0.18% for priority banking). However, SCB has the advantage for small purchases since it has no minimum commission.

As I type this, it seems that the US market is rallying and that has helped my portfolio a bit. I am at 9%+ YTD so less than 1% to hit my target return of at least 10% this year (and thus cancelling out my single digit loss in 2022). 

However, anything can happen. If market crashes again, well I guess I just have to continue buying and hope for a better 2024. 😥

Dividends Collected: Oct 23

 

Slow and steady growth of dividends this month.

Trying iShares 2028 Term Bond ETF ID28

 I bought a little of iShares 2028 Term Bond ETF (ID28) to try it out, having been reminded about it in the HWZ forums. I was aware of it previously but the prices were above face value because of low interest rates.

With the constant increase in interest rates and the 10yr US Treasury Yield touching 5%, there has been a rout in bond prices. 

If you were holding an individual bond and the price fell, if you held to maturity, you would technically not lose any money and would have collected the interest payments along the way. However, most bond ETFs do not hold to maturity, and they have to follow a preset rule and sell the bonds when they reach a certain maturity. For example, iShares LQD which is a 'medium term' bond ETF has to sell the bonds when they are 3 years to maturity to their short term bond ETF which holds bonds of 0-3 years maturity. Hence you will get hit by mark to market losses.

The iShares Term Bond ETF holds investment grade fixed income that matures in a certain year, after which all the bond redemption amounts are handed over and the ETF shuts down. So you can get the face value of the bonds back as long as you hold them to the ETF 'maturity' date.

 By implication, the purchase price is important. If the ETF price is higher than the redemption value per unit, you could end up getting less on maturity than what you invested (though you are supposed to be compensated by the interest payments of course). 

 But if you can buy the ETF at a lower price because of the bond market rout, then you are sort of guaranteed a higher amount on maturity as long as there are no defaults.  Furthermore, if interest rates drop, you might also be able to exit earlier by selling for capital gain. 

ID28 has a YTM of 6.09% and a maturity in December 2028 which does not seem like a fantastic interest rate compared to say Astrea 7 Class B which is returning 6.2%  (diversifying into Astrea 7B is something I would seriously consider as well except that Stanchart no longer allows investors to buy Astrea). However, ID28 is a bucket of more liquid bonds vs Astrea so it is more interest sensitive - any interest rate will probably lead to potential capital gain.

At the end of the day, its a small amount, more to 'test' and see how the ETF works.

COE record highs - any lesson for stock market investing?

 

I replaced my car earlier this year. While the COE felt rather expensive to me at that time, I reasoned with myself that I had been saving my money with a plan of getting a car. If I delayed my purchase because 'price can go lower' I would be embarking on a speculation exercise whereas the car purchase was a long term purchase. I was also worried that my old car would break down which would be a hassle (have to repair before trading in).

I sort of see a (bad) analogy with stock market investment here, but I hope the point gets across. High can get higher, low can get lower. If you plan to wait for a better buying or selling price, ask yourself what is your objective and what is your plan. If you have no plan or objective, then you are at the mercy of the idle chatter and 'noise' on the internet saying market going to crash and a recession coming.

Dividends Collected: September 2023

 

Vanguard ETFs paid out this month so there was a healthy increase in passive income.

FIRE and travelling

As someone who is no longer 'young', I told myself that once I reached FI, I would fly business class for long haul flights (Europe/USA).

When I was younger, I had the endurance to fly to East and West Coast USA a few times on economy (not even premium economy) and somehow survived, but I probably still can since I am relatively fit but I would probably need maybe 24-48 extra hours after landing to 'recover'. For example, I wouldn't trust myself to be able to jump into a rental car and start driving after a long-haul economy flight. 

Having occasionally flown business class for work in the past, I was familiar with the 'advantages' of business class, which to me is the flat seat or seat that converts to a bed (depending on the airline) that makes it possible to get a decent nights' sleep without neck pain after waking up.

Recently I had the opportunity to upgrade one leg of my flight to First and the surprising thing is that I found the First class 'bed' in SQ was not as comfortable as the Business class 'bed'. 

The reason is that the First seat has a hard and rigid back which becomes your "bed" when you fold down the seat. Over this hard back, SQ puts a mattress topper or foam insert (don't know what you call it) that is really not good enough so you end up feeling the hardness of the seat back. For Business class, the seat back is non-rigid, so it feels less 'hard' as a bed than First. 

Obviously the First 'bed' is a lot bigger but the SQ Biz seat is more than enough space for me (the SQ biz seat is bigger than a few other airlines like BA for example).

So having tried SQ First, I am happy to report that SQ Business class is great and some may actually find the bed more 'comfortable' than First.  When it comes to Business class seats, SQ's Skytrax ranking for the seat category is no.3, bested by only ANA and Qatar, none of which I will fly Business (i.e. Japan is too near for me to fly business, I would save the money and eat expensive Tuna sashimi).

Finally, one tip for better sleep is really to order the lightest meal possible (for SQ you can order online) or maybe even consider skipping the meal immediately before you go to sleep during the flight (load up with all the food you want in the lounge). First class you will be tempted to eat too much when your priority should be a good night's sleep 😂

Dividends Collected: Aug 2023. 100k mark reached

A large pile of cash appeared in my account as STI ETF, 3 Banks, and a Telco all paid out their dividends this month. I guess it makes sense for STI ETF to sync its dividend payment to that of its biggest holdings. I have passed the 100k mark and year on year, it is looking like a 20% increase in passive income over 2022. 

 

Time to go for Corporate Bonds?

There were many articles at the start of the year arguing that corporate bond yields were attractive and that it was time to buy. That was premised on the Fed announcing a pause in interest rate hikes. Yesterday 25/8, Powell warned that inflation was too high and that the Fed was prepared to raise rates further.  So maybe the 'experts' were as usual, wrong, or more charitably, they made the call too early.

I am going to be more charitable and say that the experts made the call too early, but it is inevitable that the Fed is going to pause at some point. 

Basically, I have to decide where to put my free cash flow. Some of it is going into equities, but I need a place to park my bond portion. As mentioned elsewhere, I have hit the $200k cap for SSB and have constructed at $10k/month T-bill bond ladder. So I am looking at diversifying to other forms of fixed income. It also seems that there are no more Astrea PE bond issues forthcoming as Astrea is a great placed to park cash. 

iShares LQDE, which is LSE-listed version one of the big USD Corporate bond ETFs (LQD is the US version), has a Weighted Average YTM of 5.68%.  iShares SLXX which is UK Corporate bonds, has a Weighted Average YTM of 6.22%.

At these levels, I think it is ok to start adding to my bond ETF holdings again and I have added to LQDE. In terms of forex risk, I feel that S$ seems on the expensive side so I don't see US$/GBP depreciating further against the S$. 

Bought more Capitaland Ascott

 

Capitaland Ascott (I'l just call it ART) announced a private placement at $1.045 and a small preferential offering at $1.025 and the price simply crashed. I bought at $1.04, $1.03, $1.01, and now $1.00. 

The amount to be raised is relatively small compared to the size of the Trust and on a pro forma basis, it is yield accretive, so what's not to like about it? Hence my conviction to continue buying even as the price tanked.

As a 'bonus', Standard Chartered is offering 100% rebates on commissions for SGX stocks until 18 August as part of their NDP celebrations, so now is a good time to buy as any.

ART is one of my biggest holdings and if the price recovers, I technically should take some profits in order to do proper position sizing.

Dividends Collected: July 2023

 

Very quiet month for dividends

July Transactions so far

I am growing more optimistic that we have turned the corner. With 4th of July out of the way, decent inflation numbers and a recession becoming less likely, the stage is set for a summer rally.

As part of my portfolio review and deciding to scale up the holdings that I want to keep for the long term, I bought in the first 2 weeks of July: LGEN, AV, VUKE, GSK, VOD, VUSD, more Frasers Logistics Trust, and the usual FSMOne 2800.HK RSP.

I will probably deploy more cash in the coming week of 17 July and thereafter sit tight till the end of the year (regular DCA of core ETFs will still take place, but the rest will probably go to T-bills).

Dividends Collected: June 2023

 

Quiet month for S$ dividends, but June is the payout month for Vanguard's quarterly dividends.

June 2023: Back to the bad habit of stock picking

 While I have repeatedly said that I will focus on ETFs, I occasionally review my portfolio (I update my portfolio page every 6 months) and identify some stocks that I don't mind adding to. 

With S&P500 now at 4300, the US market looks a bit expensive. I will continue to be disciplined to continue regular DCA of World ETFs but I also looked elsewhere. 

Last time I had the bad habit of trying to buy small amounts of multiple stocks. I am trying to limit that and adopting the principle is that if I am not willing to hold at least $50k of that counter, than perhaps it is a 'low conviction' holding and I should be looking at exiting the counter. If I still have some conviction, then I should continue to accumulate towards a minimum holding of $50k.

This led me to look at my beaten down REITs. I have identified Fraser's Logistics Trust and Far East Hospitality Trust as REITs that I would like to hold and accumulate more so I have bought both - I bought more FEHT than FLCT because FEHT looks cheaper. But I'm fully aware that hospitality REITs need to renovate more frequently compared to industrial REITs. In the meantime, I also continued DCA of Capland Ascott Trust.

On the UK front, given the recent correction on the heels of a hot inflation report, I added Aviva and Lloyds and will target to maybe add more GSK as well.

Buy Property Sure Huat?

 From time to time, there are discussions about the merits of property investing versus a stock portfolio.  When it comes to the historical track record of property investing, it is clear that property prices have, on average, moved steadily upwards, with private property prices moving faster than HDB resale prices.

Returns were further compounded by the fact that property investors would have borrowed money to buy the property at historically low interest rates.

Nevertheless, property investing is not really that passive as you usually have to rent out the property and deal with the tenant, manage repairs/maintenance/renovation. Sure you can pay an agent to do this which costs money, and you also have to manage the agent and hope he/she is trustworthy.

Property investing is not for me due to the ABSD which I am not willing to pay. In addition, the rental income is taxable and might well move me into the next tax bracket. I also prefer have a balanced portfolio that gives me the benefits of diversification. Diversification is important as past performance is no guarantee of future performance.

Finally, purely for entertainment purposes, I am showing some of the advertisements that I get regularly from property agents showing the purported value of my condo and how the number keeps going up. Its meaningless to me since I'm staying in my condo so I can't sell it....

 

June Portfolio Review

 

Did my 6-monthly portfolio review. Aviva and Lloyds traded places.

Edit: I forgot all about Sembcorp which had an amazing run. Even with the recent pullback, it has jumped into the large category but I haven't been paying attention to its price.

I have hit the SSB $200k limit in the last 6 months in order to lock-in interest rates of above 3% as rates were forecast (and did in fact fall) below 3%. Also took the plunge and used CPF-OA for T-bills. 

My ASX200 ETF, IOZ, is a new entry into the list. In line with my resolution not to stock pick, I don't think there will be many more new entries in the future. Maybe Asia ex-Jpn ETF 3010.HK, and physical gold (which briefly qualified as a medium holding due to a gold price rally but things have since settled down).

Dividends Collected: May 2023

 

In the month when OCBC, UOB, and DBS pay dividends, you can expect a nice boost to your bank account....

May 2023 investing strategy

 For the month of May, did regular DCA for a variety of ETFs:

IOZ, VWRD, LSPU ,VUKE, VHYD, CS51, 2800.HK (tiny bit with FSMOne RSP). 

For individual stocks, I bought a little LLOY when it dipped a bit as I think the bank is a good stock for value investors, and Comfort Delgro, because I like to catch falling knives and I believe that earnings can recover. Worst case it doesn't recover, its still profit and has a cash pile, so it will still be a dividend stock. However, the bulk of my purchases for May were still ETFs.

I also emptied the rest of my (usable) CPF with one final purchase of the latest 6m T-bill at 3.85%. I will just have to be disciplined about rolling over these 6m T-bills into another 6m T-bill, to minimise the loss of CPF interest.

Dividends Collected: Apr 2023

 

Quiet month for dividends presumably because its the end of the financial year. I had T-Bills maturing this month, so I recognised the interest earned this month as part of my dividends.

April 2023 performance

 

This is the performance of my IBKR portfolio. Barely ahead of S&P500 and for that matter Vanguard World (IBKR only allows you to compare 1 index at a time). 

Portfolio Value Curve

 

Inspired by Investment Moats Accumulation-Decumulation curves, I decided to draw one (with much less artistic talent) to represent where I see my portfolio value heading. 

My curve is characterised by an accumulation stage where I am earning a salary. As my passive income is sufficient to pay all my bills, I am effectively using my entire salary to invest.

At some point, I will no longer have income from work. I guess this is retirement. I will then fund my retirement expenses with my passive income.

In the graph, I mention the margin of safety concept where my excess passive income above my expenses get saved and ready to be used in years where there is a bad market (eg: GFC, COVID19). The plan is therefore not to sell anything but to rely on interest payments and dividend income.

However, if the margin of safety is large enough, which maybe could be passive income = double current standard of living, then there is really no need to 'save' the extra passive income. If dividends fall by 50% during a bad year, it will still be equal to my current/expected standard of living.

I hope to use any extra passive income I happen to have each year to do some charity work to keep myself active during the retirement years. That is better than spending it on myself which may lead to lifestyle inflation and a 'money no enough' syndrome when a bad year comes along.

Having achieved FI in 2021 and not hating my job, I still hope to continue working. If I am not retrenched, achieving 2X is a distinct possibility. I am also grateful that I am in pretty good health. At least my blood tests show that I am not in immediate risk of terminal disease - I am happy that I able to avoid needing cholesterol medication as I have quite a few friends on medication. However, my health can still be improved further and I have a plan to improve it, all I need is the discipline 😃

Finally, not everyone will be able to achieve 2X passive income on retirement. Therefore, someone with a different accumulation pattern may not find this applicable to them but will find the curve in Investment Moats to be more applicable. That's fine, as this post is about sharing my own experience, I am not a trained financial planner so I would hesitate to provide more general advice.

SBMay23 3.07%: Reached the SSB quota, looking for other fixed income

 I applied for $29k of the latest SSB, SBMay23 with an average yield of 3.07%. With this application, I now have $200k worth of SBB which is the maximum an investor can hold. 

Even though this looks like the last SSB yielding >3% for the forseeable future, investors got the entire amount they applied for. While some speculate that liquidity has dried up, I believe that this might be a case of investors like myself who are close to hitting the $200k limit so they either can't apply, or can only apply for a little bit more.

I also suspect that not everyone is redeeming lower yielding SSB to apply for this one. I have a 2.8% SSB which I did not redeem because 3.07% is not a huge difference.

Now I have to look for alternatives to SSB.

1-yr T-Bill 3.58% using CPF

 I submitted a 3.55% bid for the 1-yr T-Bill using CPF. As the cut-off yield was 3.58%. I was fully allocated. I have basically used up most of my spare CPF monies for T-bills this month (together with the 3.75% 6m T-Bill). 

Next up will be to apply for what may be the last SSB that is yielding more than 3% for a long time

Finance Independence through Dividends: Only works if you have a lot of money?

 While I have a draft blogpost to respond to some other points, they probably need some editing for length and clarity. In the meantime, I will do a quick response to Kyith's response article where he addresses a comment Sinkie made in comments section.

Kyith says in response to the point of there being a number of apparently "successful" local bloggers that appear to focus on dividends: 

But we have to recognize that what may have made the plans work for many is not due just to dividend income but that their capital base is of a size that buffers for income volatility.

He then quote Sinkie's comment:

 I think one bias (or blind spot for readers) in many of the local successful dividend investors is the size of their portfolios, such that it is throwing out 3X of their annual spending needs.

 If the dividends is 3X at the start of one's retirement.... that's basically compensating for the next 30 years of inflation....

In my first response to Kyith's article, I agreed with him that the amount of dividends one receives could vary year-on-year. I also pointed out the income volatility can be managed through:

• Diversification
• A spending plan that allows you to cut discretionary spending in years when dividends drop (eg: COVID-19, not going on overseas holidays)
• Building in a margin of safety (eg: assuming one major bear market every 5 years, you collect extra passive income from your margin of safety for 4 years and that will act as a buffer on year 5 when there is a major bear market).

Kyith, in quoting Sinkie's 3X comment, appears to feel that in order for dividend investing to be successful, you need a very large buffer where I feel that a modest buffer is sufficient. In my view 20% in excess of current spending would be pretty good already. But remember - you DO NOT spend this 20% excess in normal years but save it in anticipation for a major bear market every 5 years.

So again, I have the same observations before:

• Valid comment from Kyith, but I appear to have a different view on how large a buffer you need. 
• The concept of having some sort of  'buffer' before you FIRE doesn't seem to be a solely dividend investing problem? 

There are many local bloggers who carefully chronicle their passive income so they at least have some empirical data about the volatility of their passive income and will be able to build in the appropriate buffer size.

XXX blog's passive income is so high, no relevance to me!

I think that it is a fair point that the thought process, decisions, that face an investor with a larger portfolio may be different in some respects versus an investor with a smaller portfolio. 

However, those who have been blogging a long time would have kept a record of their thoughts and decisions that they needed to make when their portfolio was much smaller. So you might want to look back in time to their earlier posts when their portfolio might be similar to what yours is now. 

I suppose ASSI's blog is different because he always had a large stock portfolio - which was assembled from the sales proceeds of his property investments, so there is no accumulation stage covered in his blog. But there are others who are in the accumulation stage. I achieved Financial Independence in 2021 but I'm still accumulating. 😁

Salary.sg has released a 'what percentile is your income in' and it tells me that my 2022 passive income is higher than 56.6% of all SG households. I feel blessed to have that much, though some may have more ambitious goals like top 10%, top 20%, 2X, 3X, 5X. Ultimately, as Morgan Housell says, it's whether you have enough.

Dividend portfolio will be destroyed by inflation!

It would be useful to briefly mention the issue of inflation here though it is part of other points. Inflation makes things more expensive (though the effect of inflation is uneven).  Obviously inflation affects all types of investors, not just dividend investors, so the question is whether dividend investors are more vulnerable to inflation that other forms of investing. 

This boils down to the stocks you pick. Some stocks will be able to grow earnings that keep pace with inflation, and increased earnings means higher dividends. Some stocks may not. No different from picking 'growth' stocks that fail to grow in price. 

Dividend investors may sleep better because they buy stocks in industries that they can understand and the volume & value of transactions is more transparent than other agencies. Its hard to figure out how some "growth" stocks are making money. 

Banks and the financial industry in general appear able to adapt. If prices of houses/cars go up, this means that banks can grant bigger loans. Insurers will also collect more premiums because the insured amount is larger. Investment bankers collecting a 1% transaction premium will collect more as the nominal value of investments/transactions go up. 

Financial Independence through Dividends: Yield Targeting-Risky Stocks

 

This is part 2 so I'll jump straight in. This is point number 5 from Kyith's post:

Too Much Yield Targeting Leading to More Risky Stocks 

Kyith says that one reason why a Dividend Mindset is bad is because there are some investors that will blindly buy stocks because of the dividend. In other words:

[T]hey are not respecting first principles and the first principle here is that you are picking stocks from a basket that may have more problems.

This is a totally valid point and completely fundamental. If you want to buy stocks, there are some basic investing principles you should learn, understand, and follow. If you pick stocks without following basic investing principles, the risk that you will lose money is much higher. Even if you follow basic investing principles, there is still risk, but at least you don't end up buying Eagle Hospitality Trust or Hyflux Perps.

However, I wonder how 'unprincipled investing' is a dividend investing problem. For example, you can have investors who buy any type of stock without following any principles. The classic example (or stereotype) is the investor who buys Tesla after watching a youtuber saying that Tesla is going to the moon. He may well make money and Tesla could go to the moon (depends on his entry price), but its unprincipled (because 'follow what youtubers say' is not a recognised investing principle) and higher risk compared to an investor who does his own analysis of Tesla and determines his own entry and exit prices.

I would add that taking more risk in itself is not inherently bad. Each investor has his own risk profile and his investments should mirror this risk profile. Furthermore, as I have mentioned in Part I, risk can be managed through diversification. If Kyith is trying to say that investors shouldn't engage in concentrated bets, I've mentioned in Part I that its a valid point and investors should harness the power of diversification.

The problem of demanding a certain yield or 'curve fitting'

Let's turn now to Kyith's example:

Suppose you need $60,000 a year in income, but your capital is only $1 million.

So you will end up trying to create a portfolio whose stocks pay a minimum of 6% dividend yield.

Again, another valid point. Taken to the extreme, if your capital is $1m and you need $150,000 a year in income, you are looking for something that  yields 15%, so you go out and fill your portfolio with AT1 bonds. Not a good idea. Again, someone who does not apply basic investing principles is first and foremost a bad investor, and bad investors can be found everywhere. A non-dividend equivalent could be an investor who is told that a safe withdrawal rate is 4% but says he wants a 6% withdrawal rate because Tesla will grow by more than 6% every year anyway. 

 

source: bloomberg.com

How do dividend investors deal with the 'curve fitting' issue?

I will now talk about how dividend investors can deal with the curve fitting issue. The answer is dividend growth, which refers to stocks increasing their dividend per share year-on-year.

When a principled dividend investor picks stocks, he or she is concerned about the future and whether the company can maintain and/or grow its earnings.  Fortunately, many dividend stocks are from traditional industries (there are even traditional tech stocks like CISCO which I have tiny holding in) which are relatively easy to study and analyse.

If you assemble a reasonable portfolio of quality stocks, you should expect that the average dividend to grow year-on-year (at least on a simple moving average basis).

Take for example UOB at $10, it may have been paying only $0.40 of dividends which is equivalent to 4% yield. However, in 2022, UOB paid $1.20 dividend, so your $10 initial investment is giving you $1.2 annual passive income.

Of course, as Kyith as pointed out, for every UOB, there is an SPH. I had a relatively small position in SPH and as I had posted previously, my SPH holding still gave me a CAGR of about 4% because in the end, time in market (holding SPH till the bitter end) still gave me a decent return. More importantly, the idea of diversification suggests that you will get good performers and not so good performers in your portfolio, so what is important is that the bad performers do not 'blow up' your portfolio and that the average performance is decent.

BuyafterCrash: May 2022 cash refunds from Frasers and SPH

Finally, there is some overlap between this response and Kyith's point no.8 where he talks about stocks that lose 50% of their share price. I am of course going to ask whether losing 50% of share price is more common amongst stocks that regularly pay dividend with strong free cash flow versus stocks with poor cash flow and high debt. Stay tuned. 

Financial Independence through Dividends: Income Volatility

Kyith from Investment Moats has put out a blogpost titled:

9 Strong Points to Why I Say, the Dividend Income Retirement Mindset is Not a Good Retirement Risk Management Model.

The post is well-written and well-organised so it is worth a read. I feel that his points are all valid.

Not being as organised or committed to writing a lengthy response to all 9 points, I will take a approach of occasionally posting my views on each point.


TL:DR? While the points are valid, I feel that the "reality" of Dividends is not as terrible/risky/scary as the post might suggest. In addition, some of the concerns raised apply equally to other investing strategies so I'm not sure why "dividends" are singled out for special attention.

Income Volatility?

One "problem" with dividend investing is that there is no guarantee regarding the amount of dividends received. Kyith makes specific reference to COVID:

Covid has probably given us a glimpse that your income can be very volatile.

I have no argument about this and it squares with my experience as well as the experience of other dividend investors that the amount of dividends you get each year can change.



Kyith says:

Keeping the income stable requires more thinking instead of just spending the dividends.

I fully agree that dividend investing is more than thinking about how to spend your money. That applies to any type of investing. Fortunately, dividend investors can call upon the power of diversification.


Three points to consider are:

• Point 1: Dividend income may be volatile, but not that volatile.
• Point 2: Any retirement strategy has to manage volatility, and its easy to manage
• Point 3: Long-term experience of dividend investors

Point 1: Income is volatile, but not that volatile

In 2020, COVID-19 happened, and there were 2 things that were of special significance to dividend investors:

• Earnings per share of certain sectors collapsed as economic activity in those areas ground to a halt. I can point to Comfort Delgro, a dividend investing favourite as one such victim
• Regulators told banks to stop paying dividends. As a big fan of Euro and SG banks, this was pretty significant to me.

Nevertheless, as I had a diversified portfolio comprising mainly counters that pay a dividend, my passive income fell by 'only' 20%. Other bloggers who are not as bank heavy as I am, like Dividend Warrior and GlobalPassiveIncome only suffered income falls of about 3% and 13% respectively. (2nd figure is my estimate from his blog, he didn't specifically state his income fall). Furthermore, the fall in dividend income was only temporary and everyone's dividend income recovered by the following year.


As long as you remember that diversification doesn't mean having only DBS, UOB, and OCBC in your portfolio, that's a good start.


Of course, some might say that COVID-19 was only a minor blip compared to the Great Financial Crisis. Wouldn't your dividend income have collapsed during the GFC?


I had a brief look at the data and there is some cleaning up to do (eg: STI ETF had a stock split and adjustment during the GFC so one needs to normalise the dividend - similarly for stocks that did dilutive rights issues). However my recollection of the GFC is that stock prices fell more than dividends (at least for stocks I owned), so those who have to sell stocks to fund their retirement would be in at least as much trouble than those that fund it via dividends. Also, GFC was unusual as there was deflation in asset prices so the cost of living was not as high - you could buy a new Mercedes C180 for as low as $135,000 from a parallel importer during the GFC.

Point 2: Any retirement strategy has to manage volatility

If you are planning to FIRE and live off your investments, then as a matter of common sense you will need to have a plan how to manage volatility. Before you FIRE, you would have gone through a few bear markets like COVID19 which would provide an opportunity to 'stress test' and plan your volatility management strategy.


The nice thing about collecting dividends during a bear market is that you don't have to sell your stocks when they are super cheap in order to fund your expense.


Strategy 1: Decide what discretionary items you can cut
Returning to income volatility, those on regular or "FAT" FIRE will have built into their planning some discretionary items that they are willing to forgo temporarily when times are bad. In 2020, my travel expenses were ZERO because I did not travel overseas. However, you may have other discretionary items that you can forgo such as restaurant meals.


Strategy 2: Build a buffer - and retire later
Assuming that you don't hate your job, you can always build in a margin of safety by working one more year so that you can increase your dividend income a little more. For example, since my dividend fell by 20% in 2020, I might want to build in a 20% buffer to my dividend income if I absolutely do not want to cut overseas travel during 'bad years'.


Actually if you do the maths, you might only need to build in a 5% buffer which means that every year your dividend income exceeds your annual spending by 5%. Assuming that a major year-long bear market only comes every 5 years, in the 4 normal years, you will end up getting 5+5+5+5% extra dividend income which you do not spend. In year 5, when there is a major bear market and your dividend income drops by 20%, you have the extra savings from the 4 previous years.

Point 3: Long Term experience of dividend investors

The final point is a practical point. If the dividend retirement mindset is so bad, why haven't more local dividend bloggers 'failed' or 'blown up'? Instead, what we see are their dividends slowly increasing, for those who are still working towards retirement, or dividends that are stable after FIRE (ASSI).


I suspect that the simplicity of the dividend retirement concept has a part to play. Anyone can understand it and with greater understanding comes greater commitment to staying the course.


On the other hand, after the Crypto Crash, we have a pair of local bloggers who lost $2m and stopped blogging (but kept their blog up so that others can learn), another local youtuber who was really pushing Crypto, also had paper losses of a similar amount, posted 1 apology video and shut his channel (classic example of survivorship bias).


One might say that past performance is not indicative of future performance, but that applies to every investing strategy.

Conclusion

Investors must accept that income flows from dividends will be volatile. When preparing to FIRE, they should:

• Stress test the portfolio by going through bear markets and crashes and monitoring the effect on income.
• Understanding the role of diversification in stabilising dividend income.
• Have a plan to cut discretionary income in bad years; OR
• Build a 'buffer' of having dividend income above your needs, which you will save every year to prepare for the next (temporary) crash.

First online application for 3.75% T-Bills using CPF

 

With OCBC rolling out online applications for T-Bills using CPF funds last month, I made my first application. There is unfortunately the inevitable CPF service charge but at least I can apply and make a few dollars more than the 2.5% CPF interest. The fine print says that you can only apply if your CPFIS account is with OCBC.

Applied for $100k at 3.69% and was fully allocated at 3.75%. The T-bill matures on 17 Oct 2023 whereupon I will use the funds to apply for the 26 Oct 23 6m T-Bill. CPF only pays interest on the lowest balance of each month so its good to roll over the T-Bill funds as much as possible.

Next up will be the 1 year T-Bill later this month. My concern is that the cut off yield will be much lower, because of its attractiveness to CPF investors. On MM/SSI, CPF investors are willing to bid as low as 3.3% for it.

Dividends Collected: March 2023

Dividends collected following a similar pattern to 2022 with a slight year-on-year increase

 

March 2023 performance

 

Thanks (or no thanks) to SVB and Credit Suisse, my Euro bank & financial stocks took a hit in March. At the end of the month, I have been overtaken by Vanguard World which is leading by a few basis points.

Credit Suisse and Deutsche Bank are the 2 prominent Euro bank stocks that have been hit by this crisis. Despite me holding a fair number of Euro bank and financials (LLOY, SAN, Aviva, ING, Prudential, HSBC), I have never been interested in CS or DB. From a value investing perspective, CS or DB have never been attractive to me. 

I still believe in the Euro stocks I am holding and look forward to the sector recovering. I also took the opportunity to add some more LLOY during the dip.

3.15% SSB GX23040S

I applied for $50k of this month's 3.15% SSB and got fully allocated. It was slightly oversubscribed and the cutoff was $69k. 

Next month's SSB is likely to have a lower interest rate but still above 3% so that may be my last SSB application as I am close to the $200k ceiling already.

I have one more 2.71% SSB that I could redeem if rates remain above 3%, but I'll wait and see (i.e. redeem and apply - apparently you can do it in the same month and you won't be disqualified for being over the quota)

March 2023 Strategy

 With the collapse of Silicon Valley Bank and the equally fast Fed backstop of uninsured investors, a little bit of volatility has been introduced into the market, but the operative words are 'a little bit'. By and large, investors are not panicking even if there appears to be an orderly exit of some counters. Then we have Credit Suisse, whom everyone knows is too big to fail, but investors realise that they could lose their money if the govt takes over the bank, so we are seeing another orderly exit.

The end result of all this excitement is that S&P500 is still hovering around 3900-4000 today even though a number of bank shares got hit. 

This gave me an opportunity this week to buy more VWRD under $100 which I consider to be a good price, and I also added some LSPU.  On the Singapore front, I find Capitaland Ascott Trust too tempting to pass up at $1.00 so I bought some, and also Comfort Delgro at $1.18

I expect the S&P500 to be rangebound for a few more months. However, I am optimistic that the collapse of banks favoured by Crypto firms will have a deflationary effect without causing contagion to the major banks. Hopefully Fed will only need to hike rates at most 2 more times and call it a day. I briefly looked at whether an S&P sectoral ETF like XLF was worth a punt but the price is still not that cheap - needs to fall at least 8% more, otherwise better to stick with S&P500.

Dividends Collected: Feb 2023

STI ETF paid dividends this month

 

February 2023: Slow and steady returns

 

Slow and steady performance in February 2023. While top traders may be getting double and triple digit returns, I am happy if my portfolio can beat Vanguard World by a few percentage points. After all, annualised 8% over 10 years means my portfolio value will double.

Dividends Collected: January 2023

 

Not much at the start of the year. Some local counters that paid in Jan 2022 seem to shifted their dividend schedule.

3 Feb - almost recovered from 2022 losses

 

Even though the SGD has strengthened considerably against the US$, my IB portfolio appears to have almost recovered its 2022 losses.  Having said that, I note that in 2022, my portfolio was green in Jan-Feb only to crash in March 2022. The same could happen this year though I am optimistic that it won't. Revenues of most companies should actually increase at least on a nominal basis due to inflation so hopefully that should provide some support.

Of course, companies that in debt and are not making money and find their costs increasing due to inflation may not fare that well.