Investing for income and dividend yields.

Reader:
wonder how aggressive you are at aiming dividend % yield when you were younger. Because I realized that recently you are pretty content with 5% yield or lower.







When we invest for income, a higher yield is naturally attractive but we want to exercise caution. 

We should avoid the instant gratification of yield. (See related post at the end of blog post.)

Be aware of our motivations and know what we are investing in. 

Then, we will know if our motivations and the investments match up.

Remember the pyramid:

There are investments for income and investments which are for a mix of income and growth.

Investments for income should be steady cash generators for us. 

The emphasis here is more on stability. 

They are bond like in nature. 

As they are less likely to deliver any significant growth, demanding a more meaningful dividend yield makes sense. 

However, greater emphasis should be on stability for whatever timeline we are looking at.






Investments for a mix of income and growth should also be steady cash generators. 

They could deliver significant growth over time and it makes sense to pay out less to shareholders as they need more financial resources to grow. 

So, if we are investing in such businesses, we might have to accept a lower dividend yield. 

This could change in future as the business matures and starts paying out a lot more in dividend.

Most of my investments are for income but I also have investments for income and growth such as Hock Lian Seng, Old Chang Kee, Wilmar etc. 

A more recent example would be Centurion.





What is an acceptable level of dividend yield? 

The answer will depend on what we are looking for from an investment.

Related post:
Instant gratification of yield.

Centurion Corporation Limited Full Year 2016 Report.

I recently added Centurion Corporation Limited to my investment portfolio at 38c a share and I am pleased to learn that I will be rewarded with a dividend per share (DPS) of 1c which is payable on 19 May 2017. 

An annual DPS of 2c could be the new norm for Centurion Corporation Limited if their business continues to do well, well enough to offset any increase in interest expense. 

If this should be the case, I would be enjoying a dividend yield of 5.26% on cost and for a growing business too.

For more details, see presentation slides: HERE.





I mentioned in my last blog on Centurion Corporation Limited that, although manageable, its high level of borrowings is a concern. To allay concerns, its operational cash flow must remain strong. 

At the time, I said its interest cover ratio was 3.4x and that it could weaken to 2.55x if interest rate should increase by 1%.

So, this is something I will keep an eye on as Centurion Corporation Limited reports its quarterly results for 2017 in the coming months. We want to see that its level of debt remains manageable.

Related post:
Added Centurion Corporation Limited.

OCBC 360 updated (and downgraded) again.

Once upon a time, OCBC 360 together with the OCBC Frank credit card, was my favourite combination to get higher interest income on my savings.

I just had to spend $400 with my Frank card and pay 3 bills online and I would get a 2% interest rate on my savings. With no monthly salary to credit into the account, that was the best I could do.




Then, the benefits were revised and suddenly my interest income, everything else remaining the same, halved! 

So, I junked the combo and cancelled the Frank card.

Now, this doesn't mean that the OCBC 360 is not good for others, especially those who have a monthly salary to credit into the account.

However, with the latest revisions, it is probably not as good as before.

The impression I get is that OCBC wants us to save more but is paying us less to do so.

Forget about the "Wealth" and "Save" boxes. "Salary", "Payment" and "Spend" are what most people hit.

So, after the revision, we would receive 1.8% in bonus interest whereas we were receiving 2.2% before.

Of course, the original OCBC 360 would have paid 3.0% for the same 3 conditions!

3.0% to 2.2% to 1.8%.

Alamak and I thought interest rates are rising. I must be growing old and senile.




Of course, for people without a monthly salary to credit, it would have reduced from 2% to 1% to 0.6%. This is after meeting two conditions too. Duh!

Most of my savings is with CIMB Star Saver now because they pay 0.8% up to the first $750K. 

I don't have to use their cards or pay bills online to be paid 0.8%.




If OCBC wants me to save more with them, they should make it easier and more rewarding for me to do so.

Related posts:
1. UOB ONE or OCBC 360 (plus BOC)?
2. My savings accounts and money flow...

How much is QAF Limited worth using DCF?

Warren Buffett on Interest Rates & Valuations.

Many people ask me what is a fair price for QAF Limited. Obviously, all of us will have our own answer.

Of course, depending on Mr. Market's mood, share price could go higher or lower. There is no accounting for prices or so I have heard people say.

What we can try to find out is the intrinsic value to help us make sense of the price offered by Mr. Market. After all, price is what we pay and value is what we get.

I decided to play around with some numbers to see what QAF Limited's intrinsic value should be using Discounted Cash Flow (DCF), a process which is made much easier using an online calculator I found: 
http://www.moneychimp.com/articles/valuation/dcf.htm

I will try to be more conservative because I don't know all there is to know. Instead of entering earnings per share (EPS) as 10.9c, I will enter 10c.

In scenario 1, to be even more conservative, I assume zero growth in QAF Limited's earnings and a risk free rate of 3% which is a bit higher than what is offered by a 30 years bond issued by the Singapore Government now. The risk free rate is what I am going to use as the discount rate for DCF calculation.

Stock value per share: $3.33

In scenario 2, to be even more conservative, I assume a higher interest rate environment with a risk free rate of 5%. Again, I assume zero growth in QAF Limited's earnings.

Stock value per share: $2.00

In scenario 3, to be more realistic, I will assume some growth in earnings. After all, QAF Limited's EPS has grown over the last few years. I will use a risk free rate of 5% in this scenario for that conservative element.

Stock value per share: $2.50.

Now, is QAF Limited's fair value at least $2.00 a share? You blur? Don't look at me. I am only a blogger. What do I know?

Read more about DCF: HERE.

Related post:
What is QAF Limited really worth?

3 good reasons to buy a car. (Buy a car with 4D winnings or win again?)

Reader:
I want to thank you... A friend shared your 4d pick at a gathering... I am a gambler and I bought the most... I have never won so much money gambling before...  He told me to top up my CPF but I have been thinking of buying a car...








AK:
Welcome to my blog. I will not tell you not to buy a car if you are one of the following:

#1 If you NEED a car and if you have the money for the upkeep, buy it. Upkeep? Yes, road tax, insurance, maintenance. You know. Upkeep. Paying for fuel, parking and ERP are just the smaller expenses.





#2 If you are able to make more money from owning a car, why not? If you are an UBER driver renting a car now, for example, you could save (what an UBER driver told me) $70 a day in rental. That works out to be $2,100 in a 30 day month! That's a lot of money.






#3 If you have enough money today to last you till the day you die without having to work another day of your life, if you WANT a car, what's stopping you? Hey, Y.O.L.O. See? AK is not unreasonable nor extreme like what some people say.

Now, if you are none of the above, what do you do? 

Don't buy a car! 

Why not consider this instead?

The CPF Full Retirement Sum (FRS) is now $166,000. So, you are allowed to top up your CPF-SA to $166,000.





30 years from now even if there should be no more contribution to your CPF-SA from today (i.e. if you stop working today), compounding at 4% per annum, you would have $538,403.99 at age 55.

Then, after setting aside the prevailing FRS in your CPF-RA, you could withdraw the rest of the money if you like. 10 years from then, at age 65, you would also get a monthly income for life.






Oh, the calculation above did not take into consideration the additional 1% interest paid on the first $40K in your CPF-SA. Aiyoh, never mind lah. 1%? That is small money when you are rich, right? Kidding!

100% win rate. There is no easier way for a gambler to win money. Believe it!





Related posts:
1. Chinese New Year lucky 4D.
2. Don't have to be smart to be rich.
3. Showing off my CPF numbers!

My savings accounts, recent money flow and investments.

I have a few savings accounts but my most used accounts are the following three:

1. POSB
Despite the low interest rate for my savings, I am holding on to my POSB account mainly because I have had it since I was a boy and I feel comfortable with it. I have many arrangements tied to this account and it would be a bother to terminate it. The most important function of this account for some time now is to make and receive payments for my stock market transactions.





2. UOB
The UOB ONE account provides me with higher interest income. Since I am unemployed, I don't have any salary to credit. So, the higher interest rate offered by OCBC360 and BOC to do this doesn't apply to me. With UOB ONE account, the most important criterion is spending on the UOB ONE card. I just have to charge $500 a month to the UOB ONE Card. I do spend money despite what some might think. I keep slightly more than $50,000 in this account.





3. CIMB
I know many are worried about Malaysian banks. I was worried too but I did some research into CIMB and decided that it is well run enough although it still pales in comparison to Singaporean banks. I like how it offers a flat 0.8% interest on savings per annum (on the first $750,000) and I like the free cheque book. Yes, I am an IT dinosaur and still write cheques. I keep the bulk of my savings in this account.





I know some are worried about how having more money in the bank means money is rotting away to the extent that they do not keep an emergency fund but I think the majority of us would probably be quite happy to see more money in our savings accounts.

When I shared my investment results for FY 2016, I said I added to a few positions (See related post at the end of this blog.)







In recent weeks, I reduced my investments in SPH and Hock Lian Seng.

Although I did start a few new investments this year, namely,

1. Frasers Logistics & Ind. Trust
2. CapitaLand Retail China Trust
3. Kingsmen Creatives
4. Centurion Corporation Ltd.

And added to my investments in

5. APTT*
6. IREIT Global
7. Sabana REIT (Rights Issue)
8. Religare Health Trust






When I logged into my POSB account just now, I saw a balance which is a little bit more than what I would maintain usually. 

The total value of the stocks that I sold must be higher than the total value of the stocks I bought in recent times. 

Related to this, I decided to see exactly how much money came in and how much went out for the whole of 4Q 2016 and the current year to date:

Outflow:
$284,370

Inflow:
$320,090

Net inflow:
$35,714

Why am I sharing this? I just feel like it, I guess. Nothing profound.

If you manage to get something useful from this blog, I am glad.





However, we should not read too much into the musings of a mental investor who blogs as a past time.

Related post:
Full year passive income from non-REITs.

* With the rather substantial run up in APTT's unit price since December last year, I decided to reduce my investment in APTT today, retaining only the legacy position from its MIIF days. 

Some might remember that I added to my investment in APTT on the assumption that a DPU of 4c is more sustainable than 6.5c and at 37.5c a unit, I was looking at a 10.66% distribution yield from a heavily leveraged entity. Now, it has come down to 8%. 





As a more sustainable 8% distribution yield could be found in some less heavily leveraged entities, I am selling APTT at a price I would not buy at.

Hence, the net inflow of funds revealed earlier will see an increase in the next two days, everything else remaining equal.

What is QAF Limited really worth?

Gardenia is providing the best that consumers deserve! Impressive!

QAF Limited has announced a 129% increase in full year net profit. 

A final dividend per share (DPS) of 4c has been declared. Total DPS for the year is 5c.

Why the big jump in net profit? There is an exceptional item which accounts for almost $60 million worth of income.

Earnings per share (EPS) for the full year 2016 is 21.4c. Excluding the exceptional item, EPS is 10.9c which is still a very decent 16% increase over 9.4c from the year before.

I have said before that QAF Limited should trade at a PE ratio of at least 14x. However, if what happened at Auric Pacific is any gauge, QAF Limited should trade at a higher PE ratio.

Shareholders of Auric Pacific (think Sunshine bread) received an offer price of $1.65 a share in early February. I said then that the offer valued Auric Pacific at about 18.3x PE ratio.

Based on Auric Pacific's full year results released a few days ago, a full year EPS of 5.74c means that the offer price of $1.65 valued Auric Pacific at 28.7x PE ratio! (See announcement: HERE.)

I have also found out that leading packaged bread bakeries in Thailand and the USA trade at 19x and 23x PE ratios, respectively. 

Based on all these comparisons, QAF Limited even at $1.55 a share is still inexpensive. At 18x PE ratio, it should trade at $1.96 a share.

Of course, I do not know if Mr. Market is willing to pay $1.96 a share for QAF Limited and, frankly, this is more of an academic exercise for me. After all, I am more interested in collecting dividends from well run businesses.

In January, QAF Limited announced plans to expand their operations in the Philippines, a market which is doing very well for them. All else remaining equal, they are likely to do even better once their expansion in the Philippines is completed in the next 2 years.

What is QAF Limited really worth? Don't ask me. I am just a blogger. What do I know?

See results: HERE.
Related post:
Good entry price for QAF Limited?

I bought shares of XXXX and I am worried now.

I get emails like this quite frequently:

"I am very new to investing and am learning a lot from your blog. May I seek your advice on whether to buy/sell XXXX? I have recently bought XXXX shares at $X.XX and am worried about their involvement with XXXX. Should I sell or hold?"

I always say if we know the value of our business, we will know if the market price makes sense. 

If we know, then, we can take advantage of fluctuations in market prices.

I rarely recommend courses for readers to attend but I have suggested readers who are serious about becoming investors for income to attend Dividend Machines. In fact, I told some readers that they should sign up because they really need help.

Some tell me that they will wait for the next intake and I tell them if they are serious about investing for income, they should learn the ropes now.

Don't tell me "no time".

If we want to do anything, we should make time to learn how to do it first. What's so different about investing for income?

Make time to go for Dividend Machines this year. It is an online course with a 1 day workshop.

Being mostly online, you learn at your own pace and going for a one day workshop later isn't very time consuming, is it?

How much does Dividend Machines cost? Under US$300 per pax. It doesn't cost an arm and a leg.

This intake for Dividends Machines will close very soon. 

To be exact, it will close at 2359 hrs on 26 Feb 2017. That is tomorrow.

DIVIDEND MACHINES
2017 INTAKE.

If we need help, the sooner we get it, the sooner we enjoy the benefits. Still thinking if you should sign up?

Sign up here:

Again, this is closing at 2359 hrs on 26 Feb 2017 (Sunday).

If you feel that you need guidance investing for income, sign up for this.

Invested in ST Engineering at the right price.

Reader says...
Hi AK,

I remembered you mentioned ST Engineering in one of the session (Evening with AK and friends) a couple of years back (2015) and shared that through one of your readers, you have a greater understanding of their business model. 






At that point, you mentioned you would look at entering the market if it goes below $2.9 per share, it was hovering around $3.2.

It was my first time attending your session so my memory is pretty hazy. 

But I am hoping if you can shed more insights in how you look at valuing ST Engineering? 

I managed to scoop a little shares at $2.7! :)

Thanks,
YC




AK says...
Hi YC,

That was probably many moons ago. $2.7 a share is a very good price. 

I would hold on to it. ST Engineering is a good income generating asset. :)

I shared how I valued ST Engineering using PE ratio before. 

I said this towards the end of 2014 when ST Engineering was trading at $3.30 a share:

Best wishes,
AK

Although I continue to be invested in ST Engineering because I like the consistent and meaningful dividends, to add to my investment, I will not pay more than a 20x PE ratio. 




With FY16 earnings per share (EPS) at 15.6c, that means I would not pay more than $3.12 per share.

Related post:
Mystical art of wealth accumulation.

Added Centurion Corporation Limited to my portfolio.

I was introduced to Centurion Corporation Limited by a friend some time ago. He went in early, made his money, a lot of money, and scooted. Clever fellow.

AK is more of a plodder when it comes to investments. Investments which pay dividends consistently and meaningfully get his attention. A judicious amount of leverage is acceptable but too much leverage is scary especially now that interest rates are more likely to go up than not.

Anyway, sorting through piles of notes and cuttings in the last few days, I came across some scribbles I made about Centurion many moons ago. 

I took a quick look at the chart and it got me interested enough to do something more.

Centurion's share price was declining. It was clearly in a downtrend. 

Now, it looks like it has bottomed.

I always say that when there is blood on the street, I want to take a look. 




This time, I think that I am a little late since the share price broke resistance provided by the 200d moving average (MA) at 35c, came down a bit, not quite testing the 200d MA and moved back up.

The blood might have begun coagulating by now but, still, blood is blood.

For those who don't know, Centurion is in the business of running dormitories for workers and students. They are landlords. 

It is a business that is easy enough to understand, especially for those of us who like investing in REITs.

A taste of life in a dorm for workers.



So, what prevented me from investing in Centurion until now? A very high debt level and a weakening business environment.

There are many ways of looking at debt. I just look at their properties' valuations and what they owe to get a quick idea of the gearing level. 

They had about $700 million worth of debt against investment properties valued at about $940 million. 

Without taking anything else into consideration, that was a gearing level of about 74.5%.




I read that they have repaid $100 million since my scribbles and, so, their gearing level should be reduced to 64% or so. Still pretty high.

Having said this, some might remember that I said before (and most recently in a blog post on Croesus Retail Trust) that if a high debt level is matched by an ability to service the debt, it becomes less of a concern. So, interest expense must remain manageable.

In Centurion's case, there is a legitimate worry that a slow down in the economies in Singapore and Malaysia where its dormitories for workers are located would affect its business negatively.





Of course, Centurion has dormitories for students in Singapore, Australia and the UK too but the bulk of its business is still in dormitories for workers.

During bad times, highly leveraged businesses with reduced cash flow would find themselves in a pinch, to put it mildly. If interest expense goes up and cash flow goes down, the ship could be in danger of sinking.

Centurion has pretty strong cash flow and they have been able to cope with a high level of debt. Its operating cash flow is about 3.4x its interest expense. It isn't a fantastic interest cover ratio but it shows that interest expense is manageable.

However, if interest rate goes up, interest cover ratio will reduce if we do not see an improvement in cash flow, just like for REITs.




Assuming that cash flow and debt level stayed the same, in Centurion's case, based on $600 million worth of debt, a 1% increase in interest rate would mean $6 million more in interest expense. This would increase interest expense by 33% and reduce interest cover ratio to about 2.55x.

Of course, it would also put a dent in earnings. As investors for income, this is of interest to us because Centurion is not a REIT and it doesn't have to pay out 90% of its cash flow since it has no incentive to do so. However, Centurion does pay a percentage of its earnings as dividends to shareholders. Reduced earnings could mean reduced dividends.

Assuming an earnings per share (EPS) of 4.5c and number of issued shares at 740 million, a $6 million increase in interest expense would knock about 0.8c off EPS. This brings EPS to 3.7c.

Based on a possibly reduced EPS of 3.7c a year in future, paying a dividend per share (DPS) of 1.5c per year is still undemanding. This is assuming that business does not take a turn for the worse.

Paying 38c a share, I decided that a dividend yield of 3.95% is acceptable to me based on the above assumptions and a 40% payout ratio.

Centurion's share price seems to have bottomed although a retracement to the 200d MA which has started rising wouldn't surprise me. Prices climb a wall of worries.



Presentation (January 2017): HERE.
Factsheet: HERE.

My investment portfolio, market value and position sizing.

Tachikawa City, Tokyo, was ranked the third most desirable city to live in due to its easy access to central Tokyo. Croesus Tachikawa consists of three basement floors and eight floors above ground. 

I feel that I have been blogging a bit too much recently and it is probably a good idea for me to go offline for a few days.

So, it won't just be blogging that I am avoiding but everything else that requires me to go online to do as well. Hence, I won't be replying to comments and emails either.




Before I go offline in another few hours for the next few days, I should respond to a request from a reader.

Reader:
"I know you won't reveal your portfolio's details. You also won't tell us the size of your portfolio and the average yield."

Now, I know some bloggers share full details of their investment portfolios. I don't know their reasons for doing so. They probably feel comfortable with sharing in detail but I don't.

After some thought, I decided I am comfortable enough to share the sizes of my investments in bands just like how companies disclose remuneration of top executives in their annual reports.





Aqualine Golf Club in Tokyo, an AGT asset.

Based on current market value:

From $350,000 to $499,999:
AIMS AMP Cap Ind'l REIT

From $200,000 to $349,999:
ACCORDIA Golf Trust
CROESUS Retail Trust
FIRST REIT

From $100,000 to $199,999:
ASCENDAS H-Trust
QAF Limited
WILMAR Int'l

All other investments in my portfolio have market values of less than $100,000 each, with many of them being lower than $50,000 each.

Without revealing specifics, this gives an idea of the relative sizes of my investments.


Wilmar went into the sugar business in 2010.

Why did I decide to share in such a manner after refusing to reveal anything more specific for so many years?





I have said before that position sizing is important and how we size our investments should depend on our own circumstances and not someone else's. 

If someone we respect and trust invested $40,000 in a stock, it does not mean that we should too.

We should size our investments in such a way that if it should go wrong, it would not set us back too much. If we should get it wrong, it should not take us a very long time to recover.

So, for example, taken on its own, to most people, it might seem like I have a very big investment in Accordia Golf Trust. However, in relation to the size of my entire portfolio, it is actually not that big.






I have refused to share my portfolio in detail all along because I know some people might just replicate it but probably on a smaller scale. So, I still refuse to do it.

After all, apart from our circumstances, we should also size our investments based on our motivations and beliefs. 

My portfolio suits me. It might also suit some other people but it definitely doesn't suit everyone else.

So, why did I choose to share in such a manner after refusing to reveal anything more specific for so many years? You tell me.

Until my next blog, be good. Practice prudence, pragmatism and patience. Farewell for now.

Win and win again with SRS.

I blog about the SRS pretty often and how my SRS account is a war chest. 

I also said before that I don't mind having quite a bit of money idling and waiting for opportunities. 

When opportunities come knocking, I pounce!

 Chatting with a reader in FB.

I get to save on income tax and invest for higher returns. 

It is a win win situation with both winners being me! 

Greedy AK! 

Bad AK!




SRS money cannot be withdrawn until age 62 unless we are OK with incurring a penalty. 

So, it would be good to use the money to buy into businesses which we believe will still be around when we are 62. 

This might sound amusing but it is the truth.

Of course, the businesses should pay meaningful dividends and offer sustainable yields that at least mimic CPF interest rates.

In a nutshell, invest with our SRS money when the time is right. Don't speculate with it. 




SRS money is meant to be our second retirement nest egg, after the CPF. 

Don't play play.

Being unemployed, I will not be contributing to my SRS account anymore. 

So, any growth in my SRS account will be purely organic henceforth.





Why win once when we can win twice with the SRS? 

Win and win again with SRS?

I like.

Related posts:
1. SRS, CPF and rights issues.
2. SRS: e-book and analysis.
3. How AK uses his SRS money and why?

Investor psychology and beating our fears.

This blog is a follow up to an earlier blog titled:

Increased investment in Religare Health Trust by more than 150%.




This is in response to a request by Reader A.

READER A.

 We should expect volatility in prices. 

In fact, we should welcome it as investors. 

If we do not have the stomach for volatility, stocks could be a bad place for our money.

READER B.

In a situation like that, apart from having an idea of what is a decent price to pay, how do we prepare ourselves mentally to pull the trigger?

Ask: 

To what extent can we afford to be totally wrong?




After all, if we are totally wrong, we could lose all the money we invested. 

Can we stomach that?

It is all about having peace of mind as investors. 

If you have forgotten or have never read my blog on that before. 

Read it: HERE.




Remember:

1. Don't use borrowed funds.

2. Don't use funds earmarked for other purposes.

Use only money we can afford to lose and meant for investing for income.

Even though it is money we can afford to lose, ask: 

How much of it can we lose without losing our minds if things should go wrong?




Of course, we want to avoid being wrong. 

We try our best to get our facts and reasoning correct.  

However, despite our best effort, we could still be wrong.




We want to be greedy when others are fearful but we don't want to be so greedy that we throw prudence out the window.

The resulting monetary loss from being wrong must be something we can stomach easily.

Otherwise, don't be in doubt. 

We really should stay out.