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.