Ever since the CPFB introduced a colorful pie chart of our CPF savings a few years ago, I would look forward to mine every year like a teena...
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When most people think about passive income, they think about investing in income producing assets like stocks and properties.
Most wouldn't think of interest income from saving money in a bank account given the very low interest rate environment we have been in and the even lower interest rate environment we are in today.
This isn't wrong, well, if you are not a Singaporean.
This is because we have the CPF in Singapore and all Singaporeans are CPF members.
Whenever I have conversations with foreigners about retirement funding, they are always in awe of the CPF system in Singapore.
Actually, they are envious.
The CPF pays relatively attractive interest rates of 2.5% to 5% to those of us who are younger and up to 6% for members who are more senior in age.
I just heard the jaws of some foreign friends hitting the floor.
Another quarter has come to a close and with the end of the final quarter of 2020, a rather terrible year has ended too.
It is probably a year which many would rather forget but we will probably remember this nightmare of a year for many years to come and for many reasons too.
A full year of COVID-19 has imposed a new and rather unpleasant reality on all of us.
This new reality is sticky and some of us are still trying to get used to it.
In a nutshell, COVID-19 is a black swan event of pitch black intensity.
COVID -19 has shown that things could go terribly wrong and we should not ever take the good things we have for granted.
Indeed, the only constant in life is change.
With the promise of multiple COVID-19 vaccines on the horizon, things are looking up and there is hope that COVID-19 will become a thing of the past soon.
However, once we are sure that the vaccines are safe and effective, even if we are very optimistic, it might take many months even at a fantastic rate of mass vaccination before sufficient people are vaccinated in order to achieve global herd immunity.
More likely, to be very realistic, this will take a few years to happen.
Don't be overly optimistic.
Even as optimism grows, it is important to stay pragmatic and not throw caution to the wind.
There is talk of "Disease X" and we don't know when it will strike but it is just a matter of time as we cannot bank on a rapid change in human behavior to be more considerate on a global scale.
Indeed, it might not be a simple case of being more considerate as cultural and social norms are involved and these are hard to change as they are usually deeply rooted.
What we can do as individuals as we try to return to a semblance of normality is to be aware of our own mortality, do not engage in risky activities and remain cautious to stay safe.
Be considerate in our behavior and we will also help to keep others safe.
If we always think of safety first, we can hardly go wrong.
Now that I have gotten that out of the way, what about the investment space or, rather, my investment space?
Well, many things happened to my investment portfolio in 4Q 2020.
Where to start?
Let us start with the two largest changes.
IREIT Global became the largest investment in my portfolio as I took part in the rights issue priced at 49 cents a unit.
Post rights issue, I kept on accumulating at between 58 cents and 62 cents a unit, increasing the size of my investment in the REIT further.
To understand why I took part in the rights issue, go to the link I have provided at the end of this blog in "related posts."
I also increased my investment in the local banks with the size of my investment in UOB increasing the most as I added aggressively to my position around the end of October at about $19 a share.
By doing so, I have achieved the goal of having my investment in all three local banks to be similar in size.
Of course, regular readers know that a big part of my strategy during this crisis is to accumulate local banking stocks as the local banks have strong balance sheets and the ability to pay dividends with relative ease.
I certainly hope that these much larger investments will pay good dividends in future.
Apart from increasing my investments in IREIT Global and the local banks, what else did I do in the investment space in 4Q 2020?
I also added to my investments in Centurion, SPH, ComfortDelgro, AIMS APAC REIT, Hock Lian Seng, Raffles Medical Group, Tai Sin and SingTel in 4Q 2020.
When a reader asked me about SingTel on 1 Nov 20, I said:
"No plans to blog about SingTel but I might buy some because it looks terribly oversold ..."
On 20 Nov 20, in reply to readers on Centurion, I said:
"I did buy more at 32c a share ... Mr. Market could be overly pessimistic ... especially with multiple COVID-19 vaccines on the horizon.
"Mr. David Loh bought 200,000 shares at 33.5c a share more than a month ago ..."
Then, I had this to say about Hock Lian Seng:
"Hock Lian Seng has a conservative management that is unlikely to create any excitement ...
"... for anyone who believes that the construction sector will recover once we have a handle on the COVID-19 situation."
Individually, these additional investments were relatively small five figure sums and unlikely to have a big impact but collectively they might move the needle a little bit into positive territory.
In 4Q 2020, I also increased the size of my investment in CapitaLand Retail China Trust significantly at closer to $1.20 a unit and also took part in the rights issue priced at $1.17 a unit.
CapitaLand Retail China Trust should have a much bigger and positive impact on my passive income in future.
At my purchase prices, apart from trading at about a 20% discount to NAV, it was also offering the possibility of a normalized distribution yield of about 8%.
I also like that the REIT would see reduced sectorial and geographical concentration risks after the exercise.
In 4Q 2020, I also increased my investment in Sabana REIT substantially after its proposed merger with ESR-REIT failed to materialise.
Long time readers might remember that Sabana REIT was one of the largest investments in my portfolio and how I made some money from it.
I have not done anything to my investment in the REIT since that time it had a rights issue.
So, I have been holding on to this smallish legacy position which has been a free of cost investment for quite some time and it still generates an income for me.
I feel that there is really no reason to sell a free passive income generator, especially when it is being undervalued by Mr. Market.
With the recent proposed merger with ESR-REIT scuttled in part due to the efforts of activist investors, Quarz and Black Crane, I am more confident now that we could see fair value unlocked for Sabana REIT's minority investors in future.
Peter Lynch said that he liked asset plays but he liked them more if there were people involved who would help to unlock the fair value of the assets.
Late last year, Quarz suggested that a fair offer for Sabana REIT should be around $0.545 per unit.
Given the less certain economic outlook even though there are multiple COVID-19 vaccines on the horizon, even a $0.48 per unit offer, which was how much ESR paid Vibrant Group to take control of Sabana REIT, would be better than the more recent low ball offer to merge Sabana REIT with ESR-REIT.
ESR-REIT seems to be pursuing a growth at all cost strategy which I don't like and I thought their merger with VIVA Industrial Trust (VIT) was flawed as they valued VIT too highly.
For anyone who value sustainability, I suggested that VIT's high yield was unsustainable because a big chunk of their assets had very short remaining land leases which would create other problems as well.
ESR-REIT's proposed merger with Sabana REIT recently, however, grossly undervalued Sabana REIT.
Actually, the merger is worse than that because Sabana REIT's investors would eventually have to help bear the cost of the mistake that was the merger of ESR-REIT and VIT.
Unless a much better offer is made, Sabana REIT is better off without the merger as any increase in DPU as a result of the merger is unsustainable and does not tell the whole story.
Sabana REIT has a conservative gearing ratio and also the potential to improve the occupancy and income generated by its portfolio of properties significantly on its own steam.
With occupancy lower than 80%, the REIT has ample room (pun intended) to do better especially when a rising tide should lift all boats.
While waiting for things to improve and also for fair value to be unlocked, a normalised distribution yield of about 7% on the back of a relatively strong balance sheet does not seem like a bad deal to me.
Of course, it now depends on Sabana REIT's manager to deliver and I hope Mr. Donald Han does not disappoint.
No longer a small legacy position, my investment in Sabana REIT is significantly larger in size now.
Now, I will say a few words about First REIT which, for many years, was one of my largest investments for income.
Some readers might remember that I sold my investment in the REIT more than two years ago when I blogged about it.
Recently, the blog entry on my sale of First REIT saw an increase in readership despite being more than two years old probably due to the slew of bad news about the REIT and its rights issue.
I also received questions from some readers on what should they do now?
Should those who are vested sell?
I had this to say:
"... ask yourself if you did not buy at $1.30 a unit, would you buy at $0.20 a unit now?
"Peter Lynch said before that all investments are good at the right price.
"... if you feel that you would be a buyer at $0.20 a share, you wouldn't want to sell what you have now."
We should know what we are investing in and what could be in store for us.
So, anyway, in 4Q 2020, my war chest saw big outflows but passive income also received a big boost from Accordia Golf Trust which declared two bumper income distributions as they sold all their assets.
As Accordia Golf Trust was one of my larger largest investments, the distributions were pretty significant.
Total passive income received in 4Q 2020:
S$ 336,922.24
Of course, it must be noted that much of this will not be repeated and missing Accordia Golf Trust's regular distributions, passive income in 2021 could take a hit if the other investments in my portfolio are not able to sufficiently pick up the slack.
This remains a real possibility especially if the deleterious effects of COVID-19 linger for a longer time and dividends from my investments remain reduced or suspended.
Of course, it remains speculative as to when the economy will fully emerge from the shadow of the COVID-19 pandemic and I tried to do more investing and less speculating in 2020.
I remind myself that I do not know everything.
So, I can only do what I feel are the right things and hope for the best.
Something I will continue to do is to grow my CPF savings by making voluntary contributions at least till I am 55 years old.
January is the month when I make voluntary contributions to my CPF account to max out the CPF Annual Contribution Limit.
Darry is the reason for this blog which is really my reply to his recent catalytic comment.
There are many gems in the comments section of ASSI and if you have not read Darry's comment, it is in my last blog entry and I have hyperlinked it at the end of this blog.
Actually, you might want to read his comment first as it would help you better make sense of this blog entry.
Hi Darry,
I am thinking of doing this (i.e. not doing VC to MA but simply doing VC to all 3 CPF accounts) when I turn 50 as the CPF Allocation Rates for members age 50 to 55 will place a bigger proportion of our contribution into the SA.
Just based on eye power, the increase in contribution to the SA looks like it will be a big jump of more than 40% once I turn 50 and this will last till I am 55.
I blogged about this big jump more than 3 years ago.
With the BHS increasing by $3K while the CPF Annual Contribution Limit remains unchanged in 2021, doing a $3K VC to MA in order to reach the new BHS would mean less of my VC to all 3 accounts going to my SA later on.
Easy to miss this detail if we are not diligent enough.
So, you are right that it makes sense for people of my age who, like me, do not pay income tax to forgo VC to MA and just do VC to 3 accounts in the new year.
This is for maximum benefit.
$10 is still money and I don't ever look down on money. ;)
Thank you for crunching the numbers and sharing with us here. :)
So, with this blog, AK is bringing forward his plan to stop VC to his CPF MA by one year.
Yes, AK is flipping prata and won't be doing VC to MA in 2021.
AK will only be doing VC to all 3 CPF accounts (OA, SA and MA) in 2021.
Hey, $10 is still good money.
Probably good for a few roti prata and with eggs too. ;p
I am not letting Darry's effort and kindness go to waste.
This is also why I decided to publish my reply to Darry as a blog as not many readers go to the comments section.
Readers who are in the same boat as AK will probably find this sharing interesting.
Readers who are not in the same boat now might want to take note too as there is plenty of room in the boat.
On 1 June, I wrote a piece on the new normal and how I was less sanguine about ComfortDelgro's near term fundamentals then. From a technical analysis perspective, at that time, ComfortDelgro was also trading firmly beneath the declining 50 days moving average (50dMA). The MACD, a momentum oscillator, was also in negative territory, forming a lower high and a lower low.
With COVID-19 vaccines on the horizon, things are set to improve although, realistically, numbers might not return to pre COVID-19 levels soon.
Having said this, I believe that the worst is over for ComfortDelgro.
There is still that competition from Grab, of course, but Grab is facing the same difficult environment right now.
Anyway, when I invested in ComfortDelgro, I did it with the worst case scenario of a complete write off of its taxi business in mind.
At the time, basically, even without its taxi business, ComfortDelgro would still be able to maintain its dividend to shareholders.
ComfortDelgro is mostly a public transportation company and the entire sector is under immense pressure due to the COVID-19 pandemic.
However, is ComfortDelgro going the way of Singapore Airlines (SIA)?
As things are now, it is highly unlikely.
Apart from my feeling that SIA is less essential compared to ComfortDelgro when it comes to the day to day operation of Singapore (and I could be wrong about this), SIA had a much weaker balance sheet in comparison going into this crisis.
ComfortDelgro's balance sheet is relatively stronger and they should be able to weather the crisis without having to raise funds.
ComfortDelgro was also prudent in not declaring an interim dividend earlier in the year although its balance sheet could support a payout to shareholders.
As investors for income, if ComfortDelgro was a major passive income generator for us, the loss of dividend from ComfortDelgro could be a big hole to fill.
Although there is reason for optimism now, we have to be prepared for more of the same especially if the COVID-19 pandemic drags on.
As an investor for income, this was a major reason for my strategy during this crisis to concentrate my firepower on the accumulation of banking stocks.
The local banks have stronger balance sheets and the ability to pay dividends with relative ease.
Dividend visibility always gives income investors peace of mind while waiting for things to improve.
Still, in my blog of 1 June 20, I said that although I was less sanguine about ComfortDelgro, I would still add to my investment in the business.
At the time, I was thinking of adding to my investment if Mr. Market offered me a price similar to the NAV per share of ComfortDelgro.
However, as things are surely looking up for ComfortDelgro now, this is no longer a realistic expectation.
As ComfortDelgro's share price shot up and broke long term resistance on high volume a few days ago, I bought some.
However, as the stock became quickly overbought, I decided to wait for Mr. Market to take a breather and a possible retracement to support to happen before adding more to my investment.
Prices don't usually move up or down in a straight line for an extended period of time.
Having said this, the COVID-19 pandemic has reminded me of a major weakness in the business of public transportation.
As passive income generators, these essential businesses might not be as dependable as I thought them to be.
I hope that ComfortDelgro will become a meaningful income generator in my investment portfolio again soon.
If Mr Market were to offer me lower prices from here, everything else being equal, I would probably add to my investment in ComfortDelgro again.
Back in early 2017, I blogged about my decision to substantially reduce my exposure to SPH, an old timer blue chip investment in my portfolio. However, I still retain till this day my investment in SPH made during the Global Financial Crisis more than 10 years ago. In early 2017, the decision to reduce my exposure to SPH, selling my later investment in the business, was based on the accelerated disruption of its print media business. I knew of the disruption and was expecting a gradual decline. Unfortunately and also shockingly, it happened a lot faster than I thought it would. Then, more recently, SPH's stock price crashed dramatically due to the crisis caused by the COVID-19 pandemic but failed to recover with the broader market. It reminds me of a Chinese saying: 病來如山倒. Unfortunately, SPH's print media business is a shadow of its former self today.
However, is this enough of a reason for such an enduring sickness in its stock price?
Back in the day when AK and Facebook were still friends, I had discussions with some readers on what SPH would be worth.
If we thought that the media business might be worth nothing one day, then, we could value SPH based only on its property investments. Back then, some said SPH stood for "Singapore Properties Holdings." SPH has many property investments and probably the most prominent to many people is its big stake in SPH REIT. Unfortunately, SPH REIT suffered from disruption as well when the COVID-19 pandemic hit. SPH is terribly unlucky. It is reasonable to expect that tourists visiting Singapore will not be returning to the pre COVID-19 numbers anytime soon.
It could take a year or two or more. So, although not hit as hard as hospitality, it is a reasonable assumption that SPH REIT's crown jewel of a mall along Orchard Road, The Paragon, will continue to suffer.
After all, The Paragon depends to a large degree on patronage by tourists.
Still, since SPH's NAV per share is almost all made up of its property investments today, buying at a big discount to this should give some margin of safety. Of course, like I said before, if the COVID-19 pandemic stays with us for a longer time, we could see defaults becoming more common. During the Global Financial Crisis, around the world, we saw massive devaluation of properties, for example, and a downward revaluation of 20% to even 30% was pretty common. If we were to assume a massive revaluation of SPH's property assets to distressed levels, knocking off 25%, we get about $1.50 NAV per share. So, I believe that, fundamentally, any price below $1.50 a share should give some margin of safety, all else being equal.
The lower the price, the bigger the margin of safety.
Of course, investors for income should also be interested in SPH's dividends. SPH slashed dividends drastically to conserve cash because of the COVID-19 pandemic. Prior to the COVID-19 crisis, SPH recorded an earnings per share (EPS) of 13c. SPH also paid an 11c dividend per share (DPS). With these numbers, at $1.35 a share (which was the price on 11 June 20 when I was asked about SPH as an investment by a relative), if the pandemic did not happen, it would be quite a straightforward buy.
Now, as COVID-19 lingers, there is uncertainty over the future of SPH's property investments including its student hostels in the UK.
It is fair to say that there is uncertainty too over its ongoing residential property development on a plot of land in Woodleigh in Singapore which they might have paid too high a price for.
Of course, as the local property market has remained rather buoyant in the face of the ongoing COVID-19 crisis, Woodleigh Residences could still do well for SPH and their Japanese partner, Kajima Corporation.
I do like the development's location and the fact that it is integrated with a shopping mall and MRT station on the purple line.
This is not an advertisement but if you are curious and want to take a look, here is the link:
Mr. Market just doesn't like uncertainty. Even so, SPH REIT's unit price has recovered from its lows while SPH's stock price has only recently formed a new low. Now, for a bit of speculation again.
SPH REIT's DPU during normal times was around 5.5c. Is it conceivable for SPH to pay, say, an 8.0c DPS when normal times return? Why do I ask this question? If an investment in SPH is able to give a dividend yield that is similar to or higher than the distribution yield offered by SPH REIT, I would rather invest in SPH instead of SPH REIT.
This is especially when Mr. Market is offering a selling price now that has discounted SPH's media business and more. Then, any better performance by the media business however unlikely would simply be a bonus.
So, was I thinking of increasing my investment in SPH at $1.35 a share?
No.
Why?
Looking at the charts then, SPH's downtrend was stark. The 50 days moving average was still on a steep decline and it was providing a strong resistance. Too much dust and I could catch a falling knife. So, I decided to wait. Give it more time and see what happens.
I remember having a K.I.V. file in my army days and that was where I kept SPH, I guess.
That decision turned out to be quite fortunate.
What about now?
The air is still dusty and I could still catch a falling knife.
However, the knife is probably a smaller one and might not be as sharp.
What does this mean?
It means that if this is a mistake, it should be a less costly one.
Yes, to be quite honest, this is all still slightly speculative.
So, I am crossing fingers and maybe toes as my investment in SPH is a little larger now.
I decided to publish it as a blog as other readers might be interested in this.
"The rights issue is dilutive because it raises more money than is required to acquire the rest of the Spanish portfolio of assets.
"Also, much of the funds raised is used to reduce gearing.
"As an investor for income, it isn't something I like and I have blogged about this view before.
"However, I like IREIT Global's freehold properties, especially those in Germany.
"I like that its interest cover ratio is very high.
"I also like that it has CDL as a strategic partner.
"With the reduced gearing, I am reasonably optimistic that IREIT Global would do better in future.
"We also want to bear in mind that IREIT Global has a relatively high distribution yield and it is probably harder to make yield accretive acquisitions.
"Like I said, I don't necessarily like the rights issue but since I like the REIT for many reasons, I think of the rights issue as a necessary evil to help it to grow.
"Now, let me add a dash of speculation.
"Once the REIT is massive enough, it should attract more investors, especially the institutional investors and that is when we might see yield compressing to 5% or lower.
"Based on the DPU post rights issue, IREIT Global could trade at 90 cents a unit or higher then.
It has been 3 months since my last blog and I hope everyone is well.
Blogging quarterly is something which is relatively undemanding and I will probably continue to do so as long as it is still interesting for most of us.
So, please think of this as the new normal.
If there are blogs apart from the quarterly ones, think of them as "extra service."
Yes, from that phrase, some can tell that AK has been watching K-drama and reading lots of Korean manga too.
Of course, Neverwinter is still taking up much of my time and "Redeemed Citadel" is the virtual world's latest expansion.
The new normal.
This is something we hear a lot of these days.
Although Singapore seems to have COVID-19 under control now, we should not think that we have conquered it.
Just look at countries which have experienced second and even third waves of COVID-19 infection.
This tells us that COVID-19 is just waiting to strike again and again if we let our guard down.
The damage caused by COVID-19 to our country's economy so far is mind numbingly shocking and the deleterious effects are likely to persist as the world continues to battle the pandemic which, unlike SARS, has exhibited very strong staying power.
Even when effective and safe vaccines become available, it will take a long time to have adequate number of people vaccinated to achieve herd immunity against COVID-19.
Those of us with adequate financial resources at our disposal will be able to deal with the crisis better.
Still, we should not throw caution to the winds as this crisis is likely to be prolonged.
How long will the crisis last?
When IATA says air travel is unlikely to recover fully until the year 2024, that is probably a good indication that the crisis could persist in the current form or another.
We should be prepared for more possible downside even as we hope that things get better faster.
Readers who have been following my blog for a long time probably know that I have a sizable emergency fund.
This emergency fund has yet to be tapped.
Of course, I hope I would not have to tap it but if I must do so, I know the fund is there.
Warren Buffett famously said that he would not operate in a manner "that depends on the kindness of strangers or even that of friends (who may be facing liquidity problems of their own.)"
It is very important to have near money at all times and especially during hard times.
Those without an emergency fund should build one now if they are still able to.
Those without a sizable emergency fund might want to strengthen the fund.
Don't risk economic hardship by speculating on when the economy might recover fully.
Only after being well prepared for possible downside should we think of investing in the stock market.
Even if we have passive income, we should still keep an emergency fund.
There is no telling whether our passive income might be negatively impacted from time to time or, worse, for a prolonged period of time.
If our cashflow is a like a stream of water, an emergency fund is like a water tank that will dispense life giving water in the event of a drought.
In 3Q 2020, my passive income took big hits and came in much lower than expected as businesses I invested in either reduced dividends paid to shareholders or suspended payouts.
Even so, compared to 3Q 2019, total passive income received in 3Q 2020 increased very slightly due to a much larger investment in IREIT Global and also an unexpected payout by Accordia Golf Trust.
Total passive income received in 3Q 2020 was:
S$ 32,023.29.
This number could have been higher but I accepted scrip dividend from OCBC which reduced the amount of cash dividend received for the quarter.
Priced at a generous discount to what was already a low share price, at $7.81 per share, I had to accept the offer.
In 3Q 2020, I dipped into my war chest and bought more shares of UOB.
This is because I would like to have my investments in all three banks to be roughly the same in size.
There is still some way to go before my investment in UOB is as large as my investment in DBS or OCBC but I am taking it slow for two reasons.
The first reason is because although the stock market seems to have bottomed in March, much of the sharp rebound in stock prices has been lost as realization sinks in that the crippling effects which COVID-19 has on the economy will very likely last for a longer time.
The second reason is because of the rights issue by IREIT Global.
IREIT Global is one of my largest investments which has been made larger as I bought more at 42 cents a unit a few months ago.
The 454 for 1000 rights issue at 49 cents per rights share and also my intention to apply for excess rights means the exercise will significantly drain my war chest.
This must be paid for by 15 October 2020.
Does this mean that my war chest would be emptied by then and that I would not be able to add to my investments in the local banks?
Fortunately and unfortunately, another substantial investment of mine is being monetized and the funds will come in on 15 October 2020.
I am talking about Accordia Golf Trust, of course.
Most probably, some money will also be refunded in my application for IREIT Global's excess rights.
Funds will flow into my war chest then.
That is all for this blog.
Till the next blog, mask up, stay safe and keep all of us safe.
If we stay united, we will win the COVID-19 battle eventually.
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