Building a Dividend Portfolio

I came across a really good article on SeekingAlpha.com and i want to share it. It is called "DIY Dividend Investors Club: Building a Sustainable long term dividend portfolio". Although it is based in the US, many principles can be reused in Singapore. We can even invest in those stocks they have highlighted. They are great dividend plays, some of the most well established companies in the world. They sell things that we need everyday of our lives to make our day a little easier. [eg. Coca cola - soft drinks, Kimberly Clark - tissue/toilet paper, Colgate - toothpaste, Unilever - various consumer goods, Procter & Gamble - Various consumer goods, Mcdonalds, Wal-Mart etc.]  This is only Part I, they are going to publish more parts in the future. Do look out for them.

However my key issue with investing in the US for dividends has always been the 30% tax they charge on all dividends!! There is a way to get around this if you are a long term investor, engage in Dividend Reinvestment Scheme if the company allows it. 

Tried to do this, a year ago but I have fallen flat in my search to establish something, my broker at OCBC said "we don't have such scheme". I gave up for the time being. If anybody knows how to escape the 30% tax, do let me know. 

I think i read somewhere that if you open an account with an US trading platform, they hold your investments in their custodian account and reinvest the dividends to buy in more units each time. I am still quite a noob when it comes to investments.

Meanwhile FEELING INSPIRED; I am thinking of adapting this strategy to Singapore stocks with the following aims:

• Portfolio Size: $100,000
• Target # of Stocks: 5-10
• Maximum Stock Concentration: 10.0% of portfolio
• Maximum Sector Concentration: 20.0% of portfolio
• Maximum High Yield Concentration: 20.0% of portfolio
• Minimum Dividend Yield: 5.0%

      
Its entirely possible to build a dividend portfolio in Singapore with the expectations to earn a minimum of 5% per year. Lets see how it goes, It will be a 20 year plan starting from 2014. 

Impact of Quantitave Easing till 2014

If we want to stay ahead of market cycle, very important to keep up to date with latest news. I was just reading this morning that US Federal Reserve might slow the pace of debt purchases designed to boost economic growth before 4th quarter. It seems that FED won't start to reduce their $85 Billion monthly bond buying until the last 3 months of 2013, they might end it in mid 2014 or later. 

The "wise" Fed chairman Ben Bernanke supposedly an expert in Great Depression, has pumped more than $2.5 trillion into the economy for two main reasons: Employment & Price Stability. Maybe i am a critic, i do not think pumping money has created more jobs. In fact, it is delaying the inevitable recession, creating asset price bubbles along the way. What is the benefit of this stimulus anyway? The US has a sluggish economy, unemployment in March was @ 7.6%. 

I am convinced this easing policy creates serious risks to the financial system over the long term, it is kind of putting me off because my previous estimation of when a recession is coming might be delayed further. However i do understand (to certain extent) why Bernanke has taken such actions, the US economy would have been in much worse shape if the Fed did not interfere (thats a fact), but many things have been standing in the way, limiting the impact of the monetary easing going forward.

What are the implications? What to look for?
Whether we like it or not, Singapore and the rest of the world is tied to what happens in the US. The economy is very interest-rate sensitive, so if the Fed cuts support too early, the market will over-react and we would see a spike in yields and we're back to slower growth. Majority of Fed officials anticipate raising interest rate until after 2015 as unemployment dives below 6.5% (thats is their prediction).

Number to look at: Interest rate will rise as soon as unemployment is below 6.5%, inflation is 2.5% average or less. General consensus is this will only happen mid 2014 to early 2015...!

What does it mean for our investment strategy? 
Those of us owning a home: Stick to your Sibor-pegged home loan till interest rates start going up, then refinance to fixed-rate to lock in a lower interest rate.
Those holding onto securities: prepare for short term pull-back, followed by another massive bull-run till Feds pull out of easing policy.  

Disclaimer: Please seek proper advice as to your investment strategy, perform your own due dilligence before investing. The above mentioned in article are just my take on the economy, others may differ in their opinion.
 

Gold in NOT an Investment

2 years ago, I was not persuaded by those analyst who kept saying GOLD is an inflation hedge hence we should invest in Gold. Many people i know did "invest" in Gold and lost quite a bit in the recent pullback. I cannot stress this enough, Gold and other commodities are not investments, you can however take advantage of the situation and trade it. An investment should give you capital gains and/or dividends.

I treat all commodities as a tool for trading and so should you. Do not be under the impression that you can hold onto Gold forever, if you do, be prepared to face huge price swings in the future. This does not mean i believe Gold will collapse, it might keep on rising as some hardcore fanatics predict Gold might even hit $5,000 or $10,000. Please be reminded that along the way, Gold price might go below $1000. 

In earlier posts, i have talked about Market Cycle. We are in the middle of another cycle, the commodities cycle where inflation is higher than usual, commodity prices keep rising. In fact Jim Rogers is correct in saying that there will be a shortage in commodities in the near future. If and unless we stop innovating new methods of food production, mineral mining, ore extraction and purification, commodities will rise non-stop. History has taught us that is not the case, look at the chart below:

We have been riding one of the steepest commodities BOOM in history. From the chart is seems we are nearing the end, i.e if technicals are followed (trades within the widening aplitude channel). Its not far away now, 2014-2015 is going to be recorded in history to be the worst fall in commodities ever.(just watch and see) 

Again my opinion here is that commodities should be traded, it shoud not be treated the same as a business which you can invest in, with the intention of "buy and hold".

Disclaimer: I am not here to discourage you from investing in commodities neither am i encouraging you to do it. Please be cautious about investing your hard earned money.
 

Few tips To Investment Planning

Investing requires discipline and I cannot stress enough the need to stick to certain set of rules. Lets look at a couple of rules I have agreed to before I began investing. Rule Number 1: Make use of Compounding Compounding is vital to grow your investments over time and anybody can do it as long as you stick to the following principles. In order to compound successfully, you need perseverance, knowledge of how it works and most importantly TIME. One should have the understanding of how compounding actually works so that he/she can stick to a savings and investment plan. I put TIME in bold because unfortunately this is no get-rich-quick scheme, compounding works only through time. But there is a catch, you MUST keep your investment money aside, that means no spending it. Although it may be boring, for people with itchy fingers want to move money around to riskier investment vehicles, just endure until such time as to when you really need the money. It should get a little more interesting after 8 to 10 years of continuous, uninterrupted compounding. Let us look at a typical example i picked out from the internet, you can just google "power of compounding" and get so many examples.  But here's one from ICMARC website:  http://www.icmarc.com/Images/investments/COTW/20080328startsavingearly.gif For someone who starts contributing (annually $4k) into his retirement plan 10 years earlier can expect to compound at least twice the amount if he were to start contributing at a later time. Another study done by Market Logic in US, shows how compounding magic can happen even if you stop contributing on a yearly basis. Let us assume investor (B) opening a retirement fund at age 19. For 7 consecutive years, he contributes $2000  at an average growth rate of 10% (7% + interest). Then he stops putting anymore money into his retirement fund. A second investor (A) makes no contributions until the age of 26 (same age at which investor B stops contributing to his retirement fund) but investor A starts to diligently contribute $2000 annually until he is 65 years old. (assuming the same 10% growth rate. Look at the incredible results in the table below. Investor B ends up with higher return on investment (ROI) than A but he only contributed for 7 years (total: $14,000). Investor B on the other hand kept contributing $2000/year for 40 years. (total of 2000x40 = $80,000). The only difference being that B has had 7 more early years of compounding than A which were worth more than all of investor A's 33 additional contributions.

* If you are below the age of 25 and reading this, i urge you to go and start investing little by little in your own choice of blue-chip stocks. Its not too late for your kids too, I suggest starting early for your kids. It's a study which i wish i discovered earlier because i had a "poor dad" using the definition by Robert Kiyosaki in his popular book "Rich Dad, Poor Dad". Unfortunately my father did not feel that his kids needed to learn about money, he only taught us to save, get a good job and save some more. Having a saving plan running concurrently with your investment plan is very important too, but as a rule, i never keep more than 8 months living expenses in my bank account. Rule Number 2: Try Not to Lose Money This may sound funny to some but i think we should have the mentality of not losing money unnecessarily. If we want to preserve our capital and eventually grow it, we must aim not to lose big money. I have noticed that most people do end up losing money through gambling, ridiculous investment schemes, poorly executed business deals, greed and often times poor market timing. Over the years, there have been so many cases in Singapore where people lost money in the stock market, options, futures, in terrible loans, mindless gambling and in their own business. This rule may be simple, but we have to be disciplined in the way we spend our money and perform due dilligence enterning into any kind of investment. Rule Number 3: It takes Money to make Money  The wealthy investor has a major advantage over the smalltime amateur investor, they have the MONEY. One can argue that actually the wealthy investor does not need the market, somehow the market always moves in their favour. Understand the wealthy investor's mindset, he already has all the income he needs, not depending on the investment outcome, removing all emotions out of the equation. He probabaly has money invested in BONDS, Treasury-bills, Money market funds, Stocks, Real Estate and Other Business shareholdings. The wealthy investor is an expert is seeing VALUE. For example, he would invest in Bonds when its cheap and yields are high or move his money to Stocks when they are cheap with higher yields. With the ultimate goal of acquiring REAL ASSETS, eventually these investors buy real estate, physical gold, jewellery, expensive watches, diamonds and artwork; Things with great value. Another thing is when there is no opportunity presenting itself, they can afford to wait. We need to have patience. What about the little guy with little or no money? They feel pressurised to make money, or SAVE, SAVE, SAVE into a bank. This is madness at current interest rates less than 1%, being offered by banks. When the small investor is not buying overvalued stocks offerting 1-2% yields, he is off to gamble away his hard earned savings like buying lottery tickets or some ridiculous get-rich quick scheme. The small investor is always trying to force the market to do something for him, he is a guaranteed loser. Without understanding VALUES, he constantly overpays swayed by his/her emotions. I like this statement which i found on the internet : "He who understands interest - earns it. He who doesn't understand interest - pays it". The poor guy usually end up in huge debts, making payments on his house, electronic equipments (Thanks to COURTS easy installment plans), loses money gambling...in short always runs after money. So why is it that life is unfair, wealthy people always have the upper hand? I thought the poor always maintain a strict discipline of never overspending. Instead of taking his extra savings and compounding it in smart income producing securities, we always see them in debt. The usual answer is "I'm not making enough money". Although I symphathise on this situation, I know its possible to take two jobs, upgrade your skills, lower your monthly expenditure, do whatever it takes to work towards financial freedom. Be Positive. It makes alot of difference, both in one's mental attitude and in the way one actually handles one's money. Rule Number 4: Investment Value Usually I will suggest that one should stick to the basic compounding system and let it work over time. But if the opportunity arises when the market offer great value, Take it! [like post Dot.Com bubble (2001), Post-Subprime crisis (2008)] I would judge an investment to be of great value if it presents Lower Risk, Attractive Return(yield), Capital Appreciation. The key to making money is definitely to stay liquid, move your money from one market to another, follow the basic rule of buying undervalued investments.