Is there really a need to invest in foreign companies in the name of geographical diversification?

This year, Singaporeans celebrate five decades of nation-building. Development, transformation and progress of this once fishing village into a modern city has been nothing short of an economic miracle. As we look forward to the next 50 years, how will SG100 be like? Will Singapore still prosper? Will Singapore still be relevant in the distant future? It is no secret that the Singapore market is lagging other major global indexes in recent years. The 2013 'penny stocks debacle' has somewhat dealt a crippling blow to the confidence of local retail investors. So naturally, people are starting to shift their funds towards foreign stocks which offer potentially better returns and diversification as there is no guarantee that a tiny island Singapore will still be around 50 years from now.

Well, in my opinion, blue-chips such as DBS, UOB, OCBC, SingTel, ST Engineering, SingPost and CapitaLand have already spread their businesses deep into other countries for years. In fact, some of them are not as 'local' as they seem although they have the term 'Sing' in their names. For instance, SingTel gets the bulk of its annual revenue from overseas subsidiaries like Bharti in India and Optus in Australia. Some REITs offer exposure to other countries too. For example, Mapletree Logistics Trust has a massive portfolio of logistics real estate spanning across Asia.

So do not fret. You can still achieve geographical diversification by being vested in these 'local' companies.

Building your own 'ETF'? Why not?

Recently, more local investors are warming up to the benefits of ETFs, more specifically the STI ETF. In general, ETFs offer diversification and low cost. In his will, even Warren Buffet endorses the merit of owning low cost ETFs from Vanguard. He is confident that over the long run, a low-cost index fund will outperform actively-managed funds with high fees.

However, simply buying the STI ETF is not really optimal for local investors. When Warren Buffet said buy an index fund, I guess he is referring to one which tracks the S&P 500 index. That particular index is made up of Fortune 500 companies! Being vested in the top 500 corporations in USA is great diversification. Now, compare it to the STI's meagre 30 companies. So, if you live in America, for sure you should invest in some kind of S&P 500 ETF. Unfortunately, I live on a tiny island nation. 30 companies is not really great in the diversification department.

Secondly, the constituents of STI are not equally weighted. The three local banks (DBS, UOB, OCBC), Singtel and Keppel make up almost half of the index. So, if an investor is already vested in these five companies,  adding STI ETF to his portfolio will lead to concentration risk instead of diversification. So remember, if you are buying the STI ETF, you are mainly investing in these five companies.

Lastly, and most importantly, there are a few companies (Noble, Yang Zijiang Shipbuilding, Keppel Corp, Sembcorp, SIA, Capitaland) in the STI which I do not wish to own. Not to mention the STI totally lack any healthcare stocks which goes against my investment strategy. Buying the STI ETF is like going to a buffet and being told you have to try all the dishes, whether you like them or not.

In my opinion, it is better to build your own portfolio according to your investment vision, conviction and financial needs. Who says you cannot build a portfolio as if you are building an ETF. For me, I prefer to customise my portfolio into a dividend-oriented ETF or income-oriented ETF.


DK

Hoping for a recession? Be sensitive. Don't say it out loud.

Singapore is facing a technical recession and some people are starting to say things like 'I hope for a recession so that I can buy more stocks/properties/cars on the cheap'. That is being insensitive. There are workers who depend on their jobs to put food on the table. They are living from hand to mouth. They will be in dire straits if they are retrenched. Saying out loud that you are wishing for a recession so that you can benefit from it is just plain insensitive.

Don't get me wrong. Economically speaking, corrections are healthy and recessions are actually necessary in a capitalistic world. They do happen within intervals of a few years. In fact, they are inevitable. However, we do not need to go around trumpeting that we want a recession. I admit that I also wish to buy stocks at fire-sale prices but I do not talk about recession in front of my friends, relatives and colleagues as I know they need to feed their families. Retrenchment will be horrific for them.

Humans tend to be greedy and selfish. This is something that I observed a few years back before the Singapore government started to implement a slew of property cooling measures to stop the property values from skyrocketing. When I spoke to some friends and relatives, they have very different views. Those who already owned a property did not like the cooling measures because the value of their houses are not increasing fast enough. Those who are looking to buy their first property were supportive of the new measures because they want to buy affordable flats. From their own perspectives, both camps were right.

So, it is alright to have your own agenda and plans to benefit yourself. But please try to be sensitive to the people around you. Have more empathy and spare a thought for others.


DK

Stock Selection process for your long-term portfolio

I would like to share how I usually take to select stocks for my portfolio. I assume you already have some emergency funds (covering 6 months of expenses) stashed away for a rainy day.

Planning Stage
Have a long-term financial plan written down on paper. Visualise your major financial goals & commitments in phases of 3-5 years. You should tell yourself, "Ok, I want to have xyz amount of assets by the time I hit 30/35/40 years old". If you are looking to start a family (mid-30s), you probably prefer more stable defensive stocks like the blue chips. Or you might even want to reduce the allocation of cash on stocks. On the other hand, if you are still young and single (early 20s), you might want to take more risk and go for a mixture of dividend plus growth stocks and ignore bonds until you are older.

Screening & Selection Stage
Once you are clear what you want to achieve financially, it is time to screen the market for stocks which fits your criteria, or at least come close to your criteria. These are the main figures that I focus on when read the balance sheets of companies which I am interested in.

• Type of industry (sunrise - healthcare & logistics or sunset - newspapers & snail mail)
• Debt
• Revenue
• Earnings
• Free Cash Flow
• Dividend payout ratio
• Yield
• Dividend growth
• P/E ratio within the same sector
• Management execution track records (mergers/ acquisitions/ joint-ventures/ AEIs/ rights issue/ private placements etc.)

As for REITs, I look at these figures;

• Gearing
• Weighted Average Lease Expiry (WALE)
• Debt expiry profile
• Land lease expiry profile
• Rental reversions track record
• Quality of assets (location, age  and design of the properties)
• Type of assets (retail, commercial, industrial, healthcare, hospitality etc.) 
• Management execution track records (lease renewal/ acquisitions/ AEIs/ rights issue/ private placements/ capital-recycling)

I would suggest starting from the STI. Treat it like your shopping list. Even the companies on the reserve list are solid choices too. Some people prefer to simply buying the STI ETF at regular intervals. I am more selective, so I am only vested in certain companies from the STI such as Singtel, Starhub, CMT, SATS and ST Engineering.

A list of the latest STI component stocks.


STI Reserve list:

• CapitaLand Commercial Trust,
• Singapore Post
• Suntec REIT
• Keppel REIT
• M1

I guess this is what the experts would call 'due diligence'. Fortunately, I thoroughly enjoy this screening process. However, I do understand some people are too busy or lack the interest in analysing balance sheets. They prefer to automate their investments. For these people, I would recommend either the POSB or OCBC regular investment saving programmes.


DK

How Dividend Knight started his investment journey

Some of my readers are curious about how I begin my investment journey. So, let me fill you guys in.

It started back in 2013 when the markets were volatile and bearish due to 'QE tapering tantrums'. After following some financial bloggers like Dividend Warrior, MusicWhiz, Investment Moats and AK for a long time, I decided to take the first step towards building my own dividend portfolio. Their portfolios inspire me, especially Dividend Warrior's version.

I am in my late thirties with no family commitments. So, I was able to utilise most of my salary, bonuses and savings for investment. Before I know it, a sizeable portfolio was built within 2 years.

My aim is to achieve $2k per month in dividends by the time I celebrate my 40th birthday. I hope all of you would join me on this amazing journey and hopefully be inspired too.




DK

SG50 Commemoration Notes

Finally! I got my hands on the SG50 Commemoration notes.

They look great! :)

The box which stores the booklet

The gold-coloured booklet

  

Dividend Knight Portfolio Update (September 2015)

	Company	Shares (1000)
1.	M1	12
2.	AIMS AMP	30
3.	Starhub	10
4.	Singtel	8
5.	Frasers Centrepoint Trust	12
6.	CACHE Logistics Trust	16
7.	SATS	4
8.	Capitaland Mall Trust	7
9.	Raffles Medical Group	3
10.	Mapletree Logistics Group	10
11.	ST Engineering	3
12.	PLife REIT	5
13.	Suntec REIT	6
14.	First REIT	10
15.	MGCCT	7
16.	Keppel DC REIT	10
17.	Sheng Siong	5
18.	Mapletree Commercial Trust	2
19.	VICOM	0.5

Dividends received in September 2015: S$1, 015.20

Total dividends received since Jan 2015: S$13, 265

Average dividends per month: S$1,105

Average dividends per day: S$36


Nowadays, there is a growing trend of buying ETFs. Well, I prefer building my own ETF for income and growth by taking solid companies from the STI components and throw in a few more REITs. Viola! The concoction is done. Yes, it is that simple. :)

For the month of September, I received S$1015.20 in dividends from:

• ST Engineering: S$150
• Mapletree Commercial Trust: S$40.20
• AIMS AMP: S$825

DK