While my RSP and roboadvisor were giving me satisfactory capital gains, I was not able to have my cake and eat it just yet as the returns were intangible and any form of dividends I received were automatically reinvested. Therefore, I turned to dividend-paying stocks on the SGX, specifically REITs, for some pocket money to make this seemingly interminable investing journey more bearable.
Disclaimer: This post will not teach you how to evaluate stocks.
Understand investor psychology
Selecting stocks for my portfolio was hands-down the most unnerving yet exciting part of constructing my portfolio. What stock do I buy? Will I get 200% returns like those investment gurus boast?? But what happens if I choose the wrong stock? What if the stock market crashes overnight and I’m not cool as I thought I would be about it??!! At this point I considered sticking to index investing but the lure of money (not even gonna sugarcoat that) was too tempting to resist.
While there is nothing wrong with having such concerns, what’s dangerous is how we act and react in the stock market when we do not keep our emotions in check. It’s always important to understand what kind of investor we are so that we can manage your own expectations and not end up making crippling moves that we will regret.
Keep your eyes on the goal and your hands on the plan
To get over these well-founded fears, I took a cautious approach and reminded myself that I was in it to invest for the long-term and not to trade for petty gains. I asked myself: What can I achieve from handpicking stocks that I cannot get from my current investments?
Since dividends was what I was looking for, I set a few simple criteria for stocks to buy so that I do not stray from my purpose.
Criterion #1: At least 5% dividend yield (to account for inflation and exceed what my savings account gives)
Criterion #2: Fixed distribution policy (ideally 4x a year)
Criterion #3: Consistent and increasing distribution (duh)
This is just a preliminary screening, I evaluate their performance with more specific indicators after that.
Reaching for REITs
Lucky for me, our local REIT scene was perfect for dividend investing since they are required to distribute 90% of their taxable earnings. I evaluated the various sectors of REITs on the SGX and screened them according to the criteria I set out previously. I even managed to find a few non-REITs!
Currently, these are some of the dividend-paying holdings in my portfolio:
- DBS Holdings Pte Ltd
- Netlink NBN Trust
- Parkway Life REIT
- Tat Seng Packaging Pte Ltd
NOT a buy call. These were attractive at my entry price, which is not necessarily so in today’s market conditions.
Frankly speaking I never considered DBS a dividend play but earlier this year the market plunged and the yield became too attractive to ignore. So you can imagine my dismay upon the announcement from MAS on capping payouts lol. The saving grace is that this is just a short-term measure and our local banks are still in relatively strong capital positions. I am also happy with my average holding price which is giving me pretty decent gains.
Based on FY19 results, my projected portfolio yield is about 4.6%. My aim is to achieve 5% dividend yield by the end of 2020 but COVID-19 has clearly thrown a spanner in the works.
Unfortunately for dividend investors, 2020 has been rather depressing thus far with most REITs cutting distribution to conserve cash. Some REITs are also changing their distribution policy from quarterly to semi-annually which adds more salt to the wound.
So much for trying to increase to 5%, I’d be thanking the heavens if I can even maintain that 4.6%, SIGH.
Dividends or capital gains?
On another note, dividend stocks tend to have lower growth in their share price so it’s really a trade-off between eating my cake now or later. If you’re younger than I am, perhaps consider a growth portfolio over an income portfolio. Remember, the whole point of investing at a young age is wealth accumulation and opting for income stocks may be playing it too safe. Have a read on how fellow young(er) investor strongandfrugal justified it on his blog.
But of course, to each their own. We all have different risk appetites and investing goals so just do as you please and create your very own portfolio to suit yourself. Don’t like stocks and don’t want to add it to your portfolio because it’s “too risky”? Then don’t! Perhaps you can opt for more conservative options like bonds instead. I will be sharing more about bonds soon so keep a lookout for that!