3Q 2024 passive income: Banks to the rescue!

Another quarter has gone by and it is time for another update.

For a change, I will reveal the numbers first.

3Q 2024 passive income:
$85.223.17

This is a slight reduction, year on year, as 3Q 2023 passive income was:
$85,307.78

Almost negligible difference but it is still a dip.

The reason for this is the much lower contribution from Sabana REIT which I drastically reduced exposure to.

The REIT was one of my largest investments but this is no longer so.

Losing one of my largest investments is bound to have a big impact on my passive income.

However, as the title of the blog suggests, thanks to higher dividends received from my investments in the banks, the impact is mitigated.

The money from the sale of Sabana REIT was used to strengthen my T-bill ladder which is, of course, my war chest.

I am in no hurry to deploy the money since I am already substantially invested in the stock market.

Looking at the investments which contributed the most to my passive income in 3Q 2024:

1. OCBC

2. DBS

3. UOB

No surprises here since OCBC is my largest investment at almost the same size as my investments in DBS and UOB combined.

DBS is going to generate more passive income for me because of the bonus issue which in effect gives a 10% uplift to dividends received.

UOB is, well, UOB. 

Conservative and plodding along but still more than decent enough return.

In a recent video, I said I would not be adding to my investments in the banks as their share prices hit all time highs.

I would wait for a pull back in prices before adding.

To be fair, at 1.2x or 1.3x book value or so, the common stock of OCBC and UOB do not look expensive.

So, if I were not invested in the local banks yet, those would be where I put money to work first.

4. IREIT Global

In a recent reply to a comment on the REIT, I said this:

"IREIT's Berlin property will be vacant for 12 to 18 months very soon. 

No income to be generated by that asset then. 

So, expect income to be impacted. 

There is also the point that you (the reader) raised and it is a point I have made many times with regards to REITs. 

They will be refinancing in a higher interest rate environment although as many as 6 or 7 rate cuts are coming by end of 2025. 

I made a video almost a year ago to talk about all these and said I would not be adding to my investment in IREIT unless unit price went down much lower. 

Still, there were readers who added at between 32c to 36c per unit. 

To be fair, it isn't just IREIT, I am not interested in putting more money in any REIT now. 

My recent video on banks and REITs made this very clear. 

My focus is on income and valuation, not so much the prices."

I recently did a podcast with The Fifth Person and there was a segment on whether banks or REITs are more attractive as investments for income.

In case you are interested, here is the video:

In the latest update, IREIT Global said that they are in the final stages of pre-letting the Berlin property to a hotel and another hospitality operator. 

They expect to double the asking rent which I believe is realistic as the Berlin property is very much under rented.

I feel that the Berlin property is currently undervalued and if the REIT's management does a good job, we should see value unlocked.

IREIT Global's gearing ratio is still very low but their borrowing cost would most likely increase in 2026 when they refinance.

This is although we are likely to see many rounds of cuts to interest rate before then as the interest rate would still be higher than what we saw in the years following the Global Financial Crisis.

However, the REIT's relatively low level of debt should help to reduce the blow higher interest rate brings.

I revealed not too long ago, my investment in IREIT Global is nursing a big paper loss.

I use the word "nursing" and not "suffering" because the REIT is still paying me a meaningful dividend even as Mr. Market feels pessimistic about it.

At the current unit price, the distribution yield is about 8% and as I feel it is undervalued, there is no reason to sell.

I am quite contented to be paid while waiting for things to improve.

However, if Mr. Market should go into a huge depression and offer me a 10% distribution yield, all else being equal, I would probably buy more.

This would be very similar to the earnings yields offered by our local banks then.

All investments are good investments at the right price.

The right price is not a static number.

It should change if circumstances affecting it should change.

5. AIMS APAC REIT

I cannot end this blog post without giving AIMS APAC REIT a mention.

Still one of my largest passive income generators after so many years.

To me, this is a risk free investment as I have recovered all my capital many years ago.

The unit price can go up or down and it wouldn't affect me at all.

For people who recently invested in the REIT, please be aware that the REIT has perpetual bonds which means that their effective gearing level is higher than the gearing level reported.

Invest in the REIT only if we are comfortable with this.

Having said this, the REIT is well run and enjoys a tail win as logistics real estate which the REIT is mostly about remains in high demand.

Remember, if AK can do it, so can you!

Expenses. T-bill. SSB. DBS, UOB and OCBC.

It has been more than a week since my last blog post.

Things have settled into a new normal for me.

In this new normal, my expenses have increased by 3x or 4x.

UOB should be very pleased with me as I exceed the $500 minimum spending required on the ONE Card by a large amount to get extra interest on my savings in the ONE Account.

The increase in expenses is going to be part of the new normal and not transitional, I suspect.

Fortunately, my passive income is buffered which means I am able to absorb the current higher expenses.

Crossing fingers that things do not worsen.

I am still not sleeping well but, fortunately, I am able to take refuge in virtual worlds.

This has saved me many years ago from going into a depression and it still works for me today.

Just spending time alone and being focused on things that have nothing to do with the real world.

Escapism?

Call it what you want but it works.

In a YouTube video I made not too long ago, I said that I could feel apathy setting in when it comes to money matters.

I can say that apathy has definitely set in.

It is next to me now, watching me as I pen this blog.

Apathy says, "What are you doing?"

AK says, "Listen to me, Apathy, you are just a guest. You should try not to get too comfortable."

Brave words.

Writing is therapeutic to me and I am just talking to myself which helps to calm my mind as I try to make sense of things.

Anyway, soldiering on.

1. T-bill yield dropping.

In the last auction, T-bill yield declined to 3.34% p.a.

It could have been worse, I suppose.

Anyway, I got my non-competitive bid filled.

Using cash, 3.34% is still better than what a regular savings account pays.

Of course, if we can get 4% p.a. like we get with the UOB ONE Account, we should maximize that first to $150,000.

With T-bill yields declining and this goes for interest rates in fixed deposits too, high yield savings accounts should have priority when parking our extra money.

There is, of course, the added benefit of liquidity.

I also use my CPF OA money to buy T-bills but I might stop doing this because the break even cut-off yield for 6 months T-bill is 3.33% p.a. in case we lose another 2 months of CPF OA interest.

I would just transfer the money from CPF IA to CPF OA when the T-bills mature.

One less thing for me to juggle.

So, it isn't a tragedy.

2. Singapore Savings Bonds.

10 year average yield on Singapore Savings Bonds is also declining. 

I bought some SSB offered last month.

That had a 10 years average yield of 3.22% p.a.

This month, the offer is for an average yield of 3.1% p.a.

It is still above the 3% average interest I would get for doing voluntary contribution to my CPF account, although not by much.

I think I will give it a miss.

Another less thing for me to juggle.

Yes, again, not a tragedy.

3. DBS, UOB and OCBC.

Things seem to have settled down for the stock prices of our local banks.

They have recaptured their supports.

DBS at $35.

OCBC at $14.

UOB at $30.

Mr. Market might have come to terms with the eventual weakening of net interest income as interest rates decline.

However, like I have said many times before, our local banks have other sources of income and they are likely to continue growing as they retain about half of their earnings.

This means that even for people who paid higher prices for stocks in DBS, OCBC and UOB, eventually, their investments will become much more valuable.

For me, being paid while I wait is not a bad thing.

Still, do not throw caution to the wind.

The world is not in a good place now.

So many things have gone wrong and could get worse.

We are fortunate to be in Singapore but we are not shock proof.

Mr. Market could go into a depression suddenly, without warning.

That is when we roll out our war chests.

Remember what I always say.

Don't be overly optimistic.

Don't be overly pessimistic.

Be pragmatic.

Be prudent.

Be patient.

If AK can do it, so can you!