China has a Flu and the Whole World Gets Sick

Taxi drivers are complaining about low pick up rate and are suffering from massive income cut. SMRT and Comfort Delgro will suffer.

Tourists are not coming to Singapore. So the likes of Gentings and Straco are suffering from zilch revenue.

Tourists are staying away from flying into Singapore given the number of cases. Singaporeans are also worried about flying out. So SIA will suffer, and the effect will cascade to SATS.  SIA has already cut large number of flights in the months ahead and staff are surplus a plenty.

No tourists, no major events, the MICE sector also suffers. So Kingsmen will suffer.

Trade grinding to a halt because China factories are only slowly trying to resume amidst their lockdowns and containment. So all the industrial and shipping side are facing slowdowns. I think Yangzijiang and industrial REITs will suffer.

Malls are pretty empty these days. All staying home to avoid crowded places.  So REITs like Suntec REIT will suffer.

Who gains in times like this? Maybe the likes of TopGlove and Riverstone, and hospitals (Raffles Medical, First REIT). Maybe the supermarket chains too, if they have a strong Internet ordering front with home delivery service.

Banks are going to suffer from increasing bad loans and slow down in loans for business.  OCBC, UOB, DBS will suffer.

Will the Telcos (Singtel, Starhub) do better as there could be more Internet traffic? But the margins are poor, and if the traffic are largely generated while at home with their existing broadbands, the effect is likely neutral.

Capitaland and even Temasek Holdings are tightening their belts and freezing pay. They are trying their best not to retrench the workforce.

Meantime, Breadtalk is being taken private. Alas.

All in, a bleak picture of downtrend in the months ahead. Another Black Swan event as nature rears its head. Definitely BUY opportunities if they survive this. Only a question of when?

I pity the graduating students from all walks joining the workforce this year.

Using Leverage for REIT Investment

So here's a play I came across, mentioned by a number of people:

• Worked for a few years, saved some money. Let's say $100,000.
• Take that $100,000, borrow some (leverage), say at an interest rate of 4%.
• Let's assume $100,000 + $100,000, giving a total capital of $200,000.
• Put everything in REITs, yielding say 6% annually - i.e. $12,000.
• Pay $4,000 in interest. And still, make $8,000.
• That's an 8% yield over a starting capital of $100,000!

Sounds good right? The numbers seem credible under such a low interest rate environment.

Let's play out this scenario ...

There is an economic downturn resulting in a drop in the valuation of REITs. The 6% yield may be there, but it is now against a lower valuation.  So suppose the value of the REITs drops 30%.  The $200,000 worth of REITs (at cost) is now worth only $140,000. At a 6% yield, that now generates $8,400. Paying off the $8,000 interest, there is still a balance of $400.  The achieved yield has dropped to 0.4%.  Still ok.

In the following year, the REIT market continues to tank by another 20%.  The $140,000 of REITs is now worth only $112,000. At a 6% yield, that gives $6,720. Paying off the $8,000 loan (that never goes down!), you are now making a loss of $1,280. The achieved yield has dropped to -1.28%. Not so ok, but probably still bearable.

And then the REIT gets taken private, giving a cash value back of $150,000. What happens now? After paying off the interests ($4,000) and the loan capital ($100,000), you're left with $46,000. Poorer than when you started.

That's now a loss of 54% of the starting capital. Can you deal with that?

Leverage, it works both ways.

On good days, there is money to be made. But all it takes is ONE bad day to wipe out everything.

I think there is money to be made with this, but the downside has to be understood.

REIT on!

Owning a property can be a real pain, especially when you are still servicing a loan. Presuming it's rented out, then comes the pain of maintaining the property and dealing with the rent collection and such. There's also the income reporting and tax deductibles. Seems like quite a bit of work.

But there's an easier alternative of course. Outsource it! Let someone else manage it, and you are effectively engaging them to do it for you. Of course they take a cut, but you still get rental returns. With just one property, there's however no economy of scale. So the overheads involved can be high.

And then we have REITs. Effectively the same thing after all, but with the property manager handling multiple properties, collecting rents, while maintaining the properties. It's diversification.

I'm quite for REITs, particularly as they can serve to generate an income stream. It's not without risks though. There will be times when they raise funds from shareholders to fund some acquisitions. Each time they do so, they could very well be collecting whatever income they paid out!

And then, we now have the Phillip APAC Dividend Leaders REIT ETF. So we can own a slice of multiple REITs even! But I have some doubts if it's worth the while right now.

• With an estimated yield of 5% dividends, its 0.5% management fee would drive it down to ~4.5% yield. I would expect to get 5-7% yield on typical REITs. So getting below 5% seems like a letdown.
• Significant chunks of the REITs are non-Singapore based. While that offers country diversification, it comes with a foreign exchange risk.
• And finally, it is a dividend-weighted ETF. If I understand it right, that means high-yielding REITs dominate. My sense is that a high-yielding REIT is not necessarily a good thing. Examine the local REITs and you can see that those yielding above 7% tends to be the ones whose total returns are huge negatives!

For now, I will keep to buying individual local REITs that are backed by parents with the muscle to provide a pipeline of properties to feed them. Capitaland, Ascendas, Mapletree. There are enough choices.

Reaping property incomes without owning any single property nor servicing any loans. I like.

When Junk Bonds Become My Moolah

Equity hasn't been kind in recent years. While a historical performance of 10-12% (with dividend reinvested) may have been the norm of past, it's been far, far lower of late. But income investing has remained decent with 3-4% dividend payouts while REITs have been giving me 5-6%.

With a combined family portfolio that has crossed seven digits, I felt that I can afford to ante up my risk palette. So I've started placing a small percentage of investment funds into a P2P platform, specifically, Moolahsense.

Spreading my investments into numerous blocks of a few thousand dollars each and across multiple loans, it's effectively creating a DIY junk bond fund isn't it? The nominal loan interests have averaged 17-18% across the portfolio so far. With many of the payments being made on monthly basis, after a while, it seems like there is an incoming payment every other day. Is that shiok or what?

But the shiokness can be deceiving. Logically, I would expect some percentage of defaults. I mean seriously, why would any company take up loans of 17-18% if they could borrow from banks at lower rates? It's almost as bad as owing credit card debts. Clearly, the banks see them as so risky that they are not even prepared to offer them a cent. So, everyone of them is a potential default case.

Like banks that make provisions for non-performing loans, I'm making a provision for 5% defaults. In simplistic sense, if a $100,000 portfolio is making 17%, that's an interest of $17,000. With a 5% default on principal, that's a loss of $5,000. But, the overall outcome would still be 12% gain in net income. Not bad.

But, if the defaults climb above 17%, I'll be in the red.

I'll see how this turns out after a year or two.

Supposing a portfolio of $1.3 million with a spread as follows:
- $1,000,000 of stocks @ 3.5% dividends = $35,000
- $200,000 of REITs @ 6% = $12,000
- $100,000 of P2P loans @ 12% = $12,000
That would generate a passive annual income of $59,000, or almost $5,000 a month.

A REIT Time, a Dividend Future - ARA

The recent MAS consultation on changes to REIT management has spurred various reactions on its future impact. Most seem to suggest that it would be positive for all parties concerned. 

One area of concern has been the impact on companies that manage REITs, especially ARA. Its management has expressed that while it may result in lower earnings, it could lead to the expansion of its asset under management and would balance off in the long run.

(05/11/2013)	1.940
52 Week Low (SGD) (04/02/2014)	1.635
52 Week Return (%)	-2.010
Average Volume ('mil)	0.2852
Beta	0.85

Financial strength
Current Ratio	1.84
Quick Ratio	-
Long Term Debt to Equity (%)	0.05
Total Debt to Equity (%)	10.98
Interest Coverage Ratio (TTM)	-
Free Cash Flow to Firm (TTM) (SGD 'mln)	68.32

Margin
Gross Margin (TTM) (%)	-
Operating Profit Margin (TTM) (%)	61.88
Net Profit Margin (TTM) (%)	55.66

Dividend §
Annual Dividend per share (SGD)	0.0500
Dividend Yield (TTM) (%)	2.93
Dividend Yield (Annual) (%)	2.93
Payout Ratio (TTM) (%)	28.24
3-Year Growth Rate (%)	4.64

Valuation
Historical P/E Ratio	19.41
P/E Ratio (TTM)	17.83
P/BV (latest interim)	4.93
BVPS (latest interim) (SGD)	0.3462
EPS TTM (SGD)	0.0956

[Source: POEMS, dated 13 Oct 2014]

Its financials appear to be in fairly good shape thus far. Question is, will it be able to absorb the effects of this upcoming change?

Its Distribution Per Share (DPS) grew steadily from 0.0397 to 0.05 (2.93% yield) between FY09 to FY13. A steady dividend payout history is an encouraging sign. Yet, its payout has kept below 30% despite this. Over the same period, its Earnings Per Share (EPS) has grown from 0.0572 to 0.0879. That means that its DPS has stayed below its EPS. I view these as positive and prudent.

Suppose its earnings were to collapse down to its FY09 level of 0.0572, would it still be able to sustain the dividend payout at 0.05 (FY13)? It would likely face increased pressure to reduce its dividends, or face an expansion of its payout ratio. But this is just one scenario.

I have a small holding in this company and will keep things unchanged for now. Happy to continue to collect its dividends meanwhile.

My World Cup Team (of Dividend Value Stocks)

Warren Buffet in several of his talks cited a hypothetical situation for the audience to consider. If you only have a ticket on which you can only punch 10 holes, and each of these holes represent one stock you could invest in, and you can never change your mind thereafter for the rest of your life, what would you choose?

[You can find some of these videos of the talks on YouTube.]

Well, it's the World Cup season right now, so in the spirit of this global event taking place in Brazil, I shall extend that to a fantasy soccer team of 11 first team players. What would my first 11 be for a team of largely dividend-yielding samba stocks?  

I am going with a conservative and defensive oriented 4-4-2 formation.

Goalkeeper

There can only be one goalkeeper. This guy has to ensure that the opponents would not score and is the last man. For this, I would go with (1) OCBC. A big strong and friendly bank to hold the last line.

Defenders

For my defenders, I'm going with the two things that are the cause of  lots of heartburn - property and cars. The main reasons for our high headline inflation. Defensive stocks with high yields.

For property, I'm going with a couple of REITS, namely, (2) Capita Commercial Trust, (3) Capita Retail China Trust and (4) Mapletree Industrial Trust.  So that gives me 3 REITs covering commercial, retail and industrial properties. 

To round off the fourth player, I would go with (5) Vicom, a proxy play for car ownership.

Midfielders

Midfielders need to control the play. They have to create opportunities for offensives, and at times have to roll back to the defensive. For this, I would go with (6) Boustead, (7) Hour Glass, (8) Kingsmen Creative and (9) SATS.

Strikers

For the offensive play, I am looking for potential value-growth players that may not be as yet high yielding but have the potential to go far. For this, I pick (10) Global Logistic Properties and (11) Yangzijiang. Exposure to China, Japan and interestingly Brazil. 

It's pretty much a 80-20 rule. So that rounds up my first 11. What's yours?

[Disclaimer: I hold all the above stocks. But this is not a recommendation to buy any of these. Do make your own assessment before investing, always.]

Retiring single and on $2,000 per month

The Case

One of my sister is only a fistful of years away from retirement. Her lifestyle is generally a frugal (if not miserly!) one. She has no mobile phone, no cable TV, no aircon, no car (in fact, no license!). Single and hence no kids either. Zilch. Simple lifestyle, doesn't cost much. A Mustachio lifestyle!

She lives in a HDB flat that has been fully paid for. My mother has in fact set aside a sum of money that will pay for all the utilities (water and electricity) for at least another 20 years. Maybe less if the price of utilities inflate.

She has some 'vice' though. She likes to travel. Occasionally, she also seems to splurge quite a bit on geomancy ornaments and temple offerings. Hobby and beliefs.

Retirement Income - The Current Situation

She said she expects to receive about $800 per month from CPF Life. I figured she would probably survive on under $2,000 a month. With $800 already coming from CPF Life, that's a shortfall of only $1,200. That doesn't seem difficult. I figured if she could invest a sum of $360,000 at a 4% yield, she would have a perpetual income to meet that gap. Didn't seem difficult at all since she had not touched her CPF for anything her entire life.

Out of curiousity, I asked her how she planned to make the difference. Turns out she had invested in some insurance scheme that would also generate a sum at the end of 10 years to grow her retirement pot. I don't know what she specifically bought, but I'm sure there must be an insurance component within. So I asked her, what the coverage was for since she didn't need to protect anyone else upon her death? There was a bit of awful silence as the realisation sank in.

Never mind. At least, the money wasn't sitting in a bank account rotting away. Hopefully it's not a Lehman Brothers sob story all over again. On the other hand, she did make a reasonable decision to leave the bulk of her money in CPF as she didn't know what to do with it otherwise. At least that would still compound at 2.5 to 5%.

Interestingly, she does buy stocks. But she's the kind that dabble in trading by buying on rumours, analyst buy calls, and get a hearth-thumping fillip from 3 cents changes in stock prices. You can pretty much guess that she's really into those penny stocks. Risky. Guess that counts as another vice?

Retirement Income - Alternative Options

I thought about this over the rest of the weekend and wondered how that 4% yield could be achieved.  I came up with a couple of possibilities, constrained by the desire to keep a lower risk profile:

Dividend-Yielding Stocks.

Buy a number of dividend yielding stocks and live off their dividends. I suggested she examine several stocks like Vicom, SATS, SPH, HourGlass, Boustead, and complement these with a bunch of REITs. I figured the stocks would generate 3-5% while the REITS would generate 4.5-7%. The upside is that some of these stocks could appreciate in value. Of course, that also come with the downside that the reverse could also happen.

Perpetuals and Bonds.

Presently, there are a few publicly traded perpetuals and high-yield bonds on the SGX - e.g. Hyflux6%CPS10, GentingSP5.125%Perp and Olam6.75%b180129US$. At 5.125% to 6.75%, seems like a combination of these could be a viable option. The yield-to-maturity (YTM) would be a little lower given that these are currently trading at above par (e.g. Hyflux's perpetual is trading at $106.8 for $100 par value on 23 Jun 14). Can't see the downside other than the underlying company folding or becoming unprofitable and hence unable to pay the coupon. The payout is otherwise fixed and would not fluctuate.

Bonds ETF.

What about buying a whole market of bonds instead? Was checking out iShares J.P. Morgan Asia Credit Bond Index ETF ("IS ASIA BND 10S$D") and noted that it holds bonds weighted towards Corporate bonds, with some sprinkling of Government bonds of Asia Pacific countries. Looks like at least 70% are investment grade. The yield seems to be about 4-5%. I believe its Expense Ratio is 0.5%. Seems doable.

Bonds Unit Trust

I also explored Bonds Unit Trust that provide regular dividend payout. But none seems suitable for the desired profile. Either dividend payouts would be too low (<4%), or risks seem high. Did I miss something?

A Matter of Choice

What would you choose?  Are there alternatives?  I greatly welcome any views and insights.

A Year of Retail Bonds and Preference Shares

It's 1 Jan 2012, and morphing shortly to the Year of the Dragon.

News seem to suggest that there will be a sprinkling of companies raising funds through Retail Bonds and perhaps Preference Shares.  Chances are good as credits are likely to be tight.  So this is one avenue for companies to secure credit.  Hopefully, these will be priced at more exciting levels, offering above 4% annual pay out?

I keep seeing comparisons that people make between the yield of REITs, comparing against bond coupon rates, and similarly, preference shares.  However, there is a big difference involved concerning the principal amount.  In the case of REITs, the yield is dependent on the current stock value of the REIT, so it will fluctuate.  In contrast, the coupon and dividend payment of bonds and preference shares are based on the original face value (or par value) and is not dependent on the trading value of the bond/preference-shares.

To illustrate, if the REIT was priced at $1.00 per share, a 5% dividend  would give $0.05 per share.  In the following year, if the REIT collapses to $0.50 per share, a 5% dividend would give only $0.025 per share.  For the REIT to continue giving out the same amount of $0.05 per share, it would have to pay out a dividend of 10%.  Whether the later is possible depends on its business revenue generated.

In contrast, a bond would be priced at $1.00 per unit.  If it has a 5% coupon payout, one gets $0.05 per unit every year until maturity, where the bond is then redeemed by the issuer at the original capital of $1.00 per unit.  The coupon payout does not fluctuate.  On the secondary trading market, the bond would be trading at values, and that does fluctuate.  But that does not affect the coupon payout.  It only has an impact if one needs to sell it off before maturity.

It is similar for preference shares.  For non-cumulative preference shares, the difference would be that there may be no payout if the underlying stock does not as well.  So it's important that such companies are well managed and have a consistent history of always paying out.  In the case of cumulative preference shares, any payout missed in one year gets carried over to the next - i.e. cumulative.  Some of the preference shares are "perpetual", and may never be redeemed.
[SGX List of Preference Shares]

The Toto special for New Year is estimated at $3 million.  If one was to win this sum, and invest the winnings in a series of bonds and preference shares (diversification!) that gives an average of 4% coupon/dividends, that's $120,000 per year perpetually!  Not bad. 

One can dream.  Buy a ticket today for that HOPE - a four letter word. 

Disclaimer: Winning is not guaranteed. *grin*  Happy New Year 2012!