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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"You have a CPFIS investment deduction from your Ordinary Account."
I suppose this means that my competitive bid (using CPF-OA money) for the last 6 months T-bill auction that took place on 14 September was successful.
A quick check revealed that the cut-off yield was 3.73% p.a. and this is still relatively attractive.
This is relatively attractive when our local banks are offering much lower interest rates for 6 months fixed deposits.
Definitely, it is more attractive than the 2.5% p.a. offered by CPF-OA even when accounting for a loss of 7 months worth of interest income which would have been paid by CPF.
Why 7 months?
This is due to how CPF calculates and pays interest on our CPF savings, taking only the month-end balance into consideration.
So, all three of my applications using cash on hand, SRS and CPF-OA money were successful.
I find it strange that there seems to be less interest in 6 months T-bill now.
It seems to be weaker compared to a year ago, for example.
I remember non-competitive bids being so plentiful that my offer to buy was only partially filled at times.
Could it be that more people are buying the common stocks of DBS, OCBC and UOB instead, given the higher level of public awareness of how attractive their dividends are?
After all, a 6% dividend yield beats 3.73% p.a. return hands down.
Could AK be doing something wrong?
OMG!
I can feel an anxiety attack coming.
Time to go sink some enemy warships to calm myself down.
Related post: Must buy T-bill? (How to transfer from CPF-IA to CPF-OA?)
Was feeling a little tired after a morning of activities.
Medical appointment followed by grocery shopping.
Lost some blood and still had to carry heavy bags.
After settling down at home, I read the news and I suddenly felt energized!
DBS increased their dividends to 48 cents a share per quarter!
Huat ah!
The decision to invest in DBS back in 2016 at $13 to $14 a share and continuing to accumulate over the years whenever Mr. Market felt depressed is paying off handsomely.
Annualizing 48 cents a share, annual dividend per share is $1.92 which means the dividend yield on my initial investment is in excess of 14% per annum!
Of course, with DBS being one of my largest investments, this is probably going to have an outsized impact on my passive income for the year.
I so stunned like vegetable!
What is even more impressive is that the higher dividend is probably sustainable.
DBS revealed that the expected catch up in funding cost has not been as bad as feared.
In fact, net interest margin saw a further increase of 12 basis points, quarter on quarter.
Net profit grew 48% year on year and 5% quarter on quarter!
I have said before that DBS is able to trade at a juicy premium to book value because of its very impressive return on equity or ROE when compared to UOB and OCBC.
DBS saw its ROE hit a new quarterly high of 19.2%, up from 13.4% in the same quarter last year!
DBS has a CET1 ratio of 14.1% which is in excess of what it feels is optimum.
So, we could possibly see higher dividends to come if DBS has no better use for the money.
DBS could, of course, simply hold on to the money for a rainy day.
Whatever the case might be, DBS is a rock solid investment for both income and growth.
Yes, just like what I said about investing in UOB, we can have our cake and eat it too.
OCBC should deliver good results tomorrow too.
I am feeling so giddy now, I need to go lie down for a bit.
Anyway, now that the serious stuff is out of the way, let's look at other stuff.
In my last blog, I talked to myself about the bumper interim dividend from UOB.
Up by 40%, it made me giddy with joy!
I expect OCBC and DBS to pay higher dividends too.
This means they should at least match their dividends in the last quarter.
If nothing goes wrong, my passive income for Q3 2023 should be somewhat higher than for Q3 2022.
If this pans out, it would be quite a feat since 2Q 2022 passive income generated by my investment portfolio increased by an impressive 42% compared to 2Q 2021 (mostly because the banks were still paying lower dividends in 2Q 2021.)
Whether passive income in Q3 2023 would be higher than Q2 2023 is less certain and, for that, I would wait and see.
On to another happy discovery.
When I checked my bank account, I found a few thousand dollars deposited by my old friend, AIMS APAC REIT (AA REIT.)
With my war chest largely depleted by IREIT Global's rights issue, getting some free money from AA REIT makes me love the REIT more.
As there will be quite a bit more dividend to be received from UOB and probably OCBC and DBS too next month, I decided to increase the quantum in my application for the upcoming 6 months T-bill with some of the money.
It is now open for application and the auction is happening on 3 August.
I will be going for non-competitive bid, as usual.
There is no need to agonize over a competitive bid since whatever the cut-off yield might be, it would most likely be higher than whatever interest rate the banks are offering for a 6 months fixed deposit.
So, the exercise to strengthen the fixed income component of my investment portfolio continues.
It gives my portfolio greater stability.
It gives me greater peace of mind to know that if I need more money, I have a T-bill ladder I can rely on.
This means I would not have to sell my stocks at prices not of my own choosing if some things should go terribly wrong in life.
Being forced to do something, not having control over our lives is not a good feeling.
With the yield curve still inverted, 6 months T-bills are going to remain rewarding.
So, they help to keep me sane and happy at the same time.
I have been busy gaming in the last few days as Neverwinter celebrates its 10th birthday.
Time really flies and I have been adventuring in virtual worlds for 8 years.
Of course, I have been retired from gainful employment for just as long.
I remember saying that CPF is a pie we would all get to eat one day if we did the right things.
Well, in another 3 years, I would get to eat the pie.
It is both a happy and depressing thought.
Anyway, like I shared in my last blog, I ignored AA REIT's rights issue.
It meant accepting an 11% reduction in income from the REIT in future.
I am staying invested in AA REIT but as a retiree without plenty of excess funds, I am less willing to deploy money into any venture that does not add to my income in the very near future.
Even if I were to take up my rights entitlement, unless I am willing to apply for a lot more in excess rights, I would still suffer some income reduction from the REIT.
Much better to put the money in T-bills in my case.
This provides a nice segue into the next topic.
My non-competitive bid for the recent 6 months T-bill was 100% filled.
3.89% p.a. huat ah!
Could have been higher but it is obvious that many kiasu people were placing very low bids of possibly under 2% p.a. in order to secure their T-bills.
Proof is in the pudding with average yield at a paltry 3.07% p.a.
I saw that and it was a face palm "Alamak AK!" moment.
I have no words.
Speechless.
OK, I stop.
Another "Alamak AK!" moment was DBS and OCBC being fined $2.6 million and $600,000 respectively by the Monetary Authority of Singapore.
It is a ton of money to AK but it is probably like being stung by a mosquito for the banks.
I am staying invested in DBS and OCBC, of course.
Still looking to add to my investment in OCBC and UOB at supports.
Hint: OCBC tested immediate support which has risen to $12.30 a share just now.
Longer term support for OCBC is still around $12 a share.
I would add to my investment in DBS too but its stock price would have to decline much more for it to be attractive to me.
Nothing to see here, move on.
I am gathering my funds to take part in IREIT Global's rights issue now.
Must pay by 11 July.
If I am successful in getting all the excess rights I aim to get as well, IREIT Global could become an investment as big as my investment in OCBC.
Yes, I am emptying my war chest for this.
This is an exciting thought but also a scary one.
I might have to do some rebalancing of my portfolio later on.
For now, I just like the idea of increasing my income from IREIT Global by at least 16%.
This is the transcript of a YouTube video I produced recently.
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I was looking at my short history with Singapore's banks this morning.
DBS was the first Singapore bank I was invested in, and this was back in early 2016.
The lowest price I paid was around $13 a share and I am still holding to those shares today.
Why did I decide to invest in DBS back then?
Regular long-time readers of my blog might remember that 2016 was the year I decided to increase exposure to non-REITs.
The rationale was that low interest rates could not last forever.
At the time, I recognized that it would be an ongoing exercise to transform my REITs heavy investment portfolio.
Of course, that exercise has become a multi-year experience.
Since 2016, I have added to my investment in DBS at various times.
I also became a shareholder of OCBC and UOB later on.
I increased my investment in DBS in April of 2020 during the COVID-19 pandemic.
It was at under $19 a share.
I also increased my investment in OCBC during the pandemic at under $9 a share.
The pandemic saw me becoming a shareholder of UOB as I bought aggressively in late 2020 at around $19 a share.
Since those purchases, my last buy price for DBS was at around $24 a share as I did not add to my investment in the bank recently.
In recent months, I favored OCBC and UOB over DBS based on valuation considerations.
The last time I added to OCBC was in March this year at under $12 a share, and the last time I added to UOB was at around $26 a share in October last year.
So, it should be obvious to anyone that over the years, I have gradually increased my investments in DBS, OCBC and UOB.
Today, their combined market value in my portfolio exceeds $1 million.
Together, they are my largest investment.
This transformation of my investment portfolio surely did not occur by chance.
However, luck played a part in allowing me to buy when I did at more reasonable prices.
In one of my recent blogs, I said that I would like to see my combined exposure to DBS, OCBC and UOB at around 40% of my portfolio.
This is still work in progress.
How long is it going to take?
Well, lacking an earned income, with only my passive income doing all the heavy lifting, it could take a few more years.
It might even take another 10 years or more, depending on what life throws at me.
Do you think it sounds like it is taking way too long to happen?
Well, consider this.
I am not going anywhere in a hurry, and neither is the stock market.
So, when am I adding to my investments?
To be honest, the common stocks of OCBC and UOB are trading at pretty fair valuations now.
If I am not invested yet, I would buy some.
However, as I am looking to add, I decided to look at the charts for some guidance.
DBS has the weakest looking chart right now.
Down trending with negative momentum, we could see it going under $30 a share.
It would have to break immediate resistance at around $32 to go higher.
UOB has a chart that suggests a bottoming process is underway.
If this is indeed the case, we might not see the bottom of October 2022 at around $26 a share retested.
Now, it seems that its common stock could trade sideways for a bit.
I would buy some in the event it closes a gap which formed in late October last year.
This is close to $27 a share.
Amongst the three banks, OCBC seems to have the nicest chart now.
If we connect the lowest points in the chart in July and October last year, we get a trendline.
We can see that this trendline was retested in March this year.
It was also retested multiple times in May last month.
The trendline has always provided support.
So, it is likely to hold the next time it is retested.
If the market should offer me another chance to buy at closer to $12 a share, I would buy some.
Just me talking to myself, as usual.
Remember that what works for me might not work for others.
For readers who who are not subscribed to my YouTube channel or who simply prefer reading blogs to watching videos, this is the transcript of another recent video I produced. ------------
People often ask me whether a stock is trading at a good price to buy?
I have been careful to side-step such questions not only because I am not allowed to give such advice, but it is also because what is a fair price is subjective.
Each time I stuck my neck out in the past, I almost lost my head.
Lesson learnt.
Anyway, the answer really depends on what we use to determine fair value.
This is also why different research houses will ascribe different fair values to the same stock.
With banks, we often see price to book value and PE ratio being used in determining fair value.
These are good ratios to use but, of course, they do not tell the full story.
They do not explain why DBS trades at a rich premium to book value while OCBC does not.
This is because of return on equity or ROE.
DBS has always demonstrated its ability to deliver a higher ROE than its smaller peers.
DBS has a ROE of 18.6%. OCBC has a ROE of 14.9%. UOB has a ROE of 14.7%.
Return on equity is a measure of how well a business uses equity or the money contributed by its shareholders plus its retained profits to produce income.
Does this explain the $35 per share fair value in the title?
This is where I need some help.
RHB Research has this to say.
"Our target price of $35.70 for DBS is based on an intrinsic value of $35 with a 2% ESG premium applied...
"The GGM derived price to book value of 1.52x is a plus 2 standard deviation from its historical mean, against a multi-year high ROE of 17%."
OMG.
It is all Greek to me.
"GGM" might stand for "Gigantic Greek Maze" in my dictionary.
Anyway, we see analyses like this often enough and the only thing that many would take away is the target price.
Thankfully, as investors for income, we are less interested in target prices put out by research houses.
We are more interested in whether the business is able to pay a meaningful dividend regularly.
So, whenever I read reports by research houses, I look for information related to earnings and dividends.
RHB Research says that DBS has the capacity to sustain 24 cents increase in dividend per year which suggests a dividend of $1.92 in Financial Year 2024.
RHB Research also thinks that a further $3 billion could be distributed either through a special dividend payout or share buybacks.
However, this assumes a payout ratio of 60%.
At $31.80 a share, a $1.92 dividend would mean a 6% dividend yield.
What do I think?
DBS has certainly demonstrated its ability and willingness to increase dividends in the past.
It could certainly increase dividends again in the future if it is able to maintain a relatively high return on equity.
Indeed, I said recently that all three Singapore banks have excess capital ratios or the Common Equity Tier 1 capital ratio.
As they only pay out half of their earnings to shareholders, their retained earnings would grow.
They could choose to pay out special dividends if they are not able to put the funds to work.
DBS has a Common Equity Tier 1 target range of 12.5% to 13.5%.
This is at 14% currently.
However, I rather work with what I know for sure to avoid disappointment.
Then, any upside would be a bonus.
Having said this, with dividend per share at $1.68, paying $31.80 per share for DBS would still give a dividend yield of 5.28% which is nothing to sneeze at either.
Still, in between dividend payouts, we could see Mr. Market acting irrationally.
This is the reason why I lean on technical analysis to give me an idea of where supports and resistance levels are.
This is even as I bear in mind the fundamentals.
For those who are interested in trading as well as investing for income, they would appreciate this.
During times of market euphoria, the common stocks for Singapore banks traded at two times their book values.
This would suggest a target price in excess of $42 a share for DBS based on its book value today.
Now, that gets me giddy.
Take this analysis with a pinch of salt since AK is no expert.
For readers who who are not subscribed to my YouTube channel or who simply prefer reading blogs to watching videos, this is the transcript of another recent video I produced.
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One of the things I keep reminding myself about is to invest in businesses with strong balance sheets.
This is especially important in an environment where cash is no longer trash.
Debt has a real cost and is much costlier today.
As an investor for income, investing in businesses which have excess capital, we could also get a pleasant surprise from time to time.
This is because we could see higher dividends from these businesses in the form of special dividends.
I made this point in my recent videos and blogs on ComfortDelGro, for example.
Now, could we expect the same from DBS, OCBC and UOB?
I hinted at the possibility in recent videos and blogs.
Today, I will share some pertinent numbers from an analysis by Philips Securities to explore this possibility.
We know that rapidly rising interest rates within the last year provided a strong tailwind to Singapore's banks.
Net interest margins rose significantly and with that, net interest income jumped.
On the back of such strong performance, all three Singapore banks increased their dividend payouts to their shareholders.
So, from that, we can establish the fact that the banks are able and willing to reward shareholders.
However, with the Fed likely to pause its rate hikes, all three banks are providing guidance for lower net interest margins for the rest of the year.
In several blogs and videos which I produced, I said that Net Interest Margins for DBS, OCBC and UOB likely peaked in Q1 2023.
DBS thinks its net interest margin could be at 2.05% to 2.1%.
Both OCBC and UOB think their net interest margins could be at 2.1% to 2.2%.
Overall loans to Singapore residents fell by almost 4% year on year while business loans fell almost 6% year on year.
Total deposits grew by almost 6% to almost $1.8 billion.
Of this, the current account and savings account proportion declined almost 19%.
This is as customers continued to shift money into higher interest-bearing fixed deposits.
With loan growth declining while funding costs have caught up, it is hard to see any significant growth in net interest income.
With the numbers provided, it should be very clear that net interest income could come under pressure.
Still, if we should stay in a holding pattern, the current level of dividend payouts by the banks should remain undemanding.
This is because the banks will still benefit from the expanded net interest margin on a full-year basis.
A bright spot could be in fee income for the rest of the year.
DBS saw 29% quarter on quarter growth in fee income.
OCBC saw 14% quarter on quarter growth, its first in 6 quarters.
UOB also saw 14% quarter on quarter growth, its first in 4 quarters.
If fee income continues to grow, it could make up for some of the loss of growth in net interest income.
However, unless this segment should see some stunning growth, it is unlikely to result in much higher earnings to justify an increase in dividends.
Still, even if the banks should maintain their current dividend payouts, they would still make for very attractive investments for income.
With dividend yields of 5% to 6% at a payout ratio of around 50%, Singapore banks provide investors with peace of mind.
Then, what about the possibility of a higher dividend I suggested before?
Where is that coming from?
Well, all three banks have excess capital ratios or the Common Equity Tier 1 capital ratio.
As they only pay out half of their earnings to shareholders, their retained earnings would grow.
They could choose to pay out special dividends if they are not able to put the funds to work.
I made use of some numbers provided by Philips Securities, but the analysis is my own.
So, take this analysis with a pinch of salt since AK is no expert.
For readers who prefer reading, this is the transcript of a video I produced yesterday sharing more reasons why I am staying invested in Singapore banks?
During "Evening with AK and friends 2023" which happened last Wednesday on 10 May, I said I was staying invested in Singapore banks and would look to buy more on any significant weakness in their stock prices.
This is because Singapore banks still remain very profitable businesses despite challenges.
In several blogs and videos which I produced, I said that Net Interest Margins for DBS, OCBC and UOB likely peaked in Q1 2023.
Funding cost has finally caught up which will squeeze the said margin.
However, the banks will still benefit from the expanded net interest margin on a full-year basis.
For example, OCBC said in their Q1 2023 report that they expect Net Interest Margin to average 2.2% for the whole year.
This is higher than 1.55% for Q1 2022 last year.
DBS, OCBC and UOB have the ability to reward shareholders with higher dividends and they have also shown a willingness to do so.
As an investor for income, this makes me happy.
With dividend yields of 5% to 6% at a payout ratio of around 50%, Singapore banks provide investors with peace of mind.
Why would I invest in a healthcare REIT that has a distribution yield of less than 4%, especially when I remind myself that it has to distribute all or almost all of its operating income to achieve that?
Even as Singapore banks have demonstrated impressive growth, they have also remained cautious.
It is good to see that they admit they don't know what they don't know.
Loan to deposit ratios for all three banks are pretty low with DBS at 79%, UOB at 83% and OCBC at 79%.
Loan to deposit ratio is used to assess a bank's liquidity position by comparing total loans to total deposits.
Singapore banks will continue to grow their non-interest income, which is never a bad thing, of course.
This is especially when net interest margin growth will plateau.
In this aspect, UOB is likely to show the strongest growth.
This is thanks to their opportunistic acquisition of Citibank's retail business in 4 south east Asian countries.
In fact, UOB saw a 457% year on year growth in non-interest income in Q1 2023.
When we compare this to the 35% growth registered by DBS, we can see why there is good reason to be more bullish about UOB.
Singapore banks are also very well run and very efficient.
Their low cost to income ratio supports this observation.
DBS and OCBC both have ratios of below 40%. DBS at 38.1% while OCBC at 37.1%. UOB has its ratio at 40.9%.
This low cost to income ratio is possible in part due to the pre-emptive move by the banks to digitize early and to do it well.
It has reduced operating cost in no small way.
Singapore banks continue to report high return on equity.
DBS has a ROE of 18.6%. OCBC has a ROE of 14.9%. UOB has a ROE of 14.7%.
Return on equity is a measure of how well a business uses equity or the money contributed by its shareholders plus its retained profits to produce income.
This is a reason why DBS has always traded at a high premium compared to OCBC and UOB. DBS has always shown that it has a greater ability to produce income.
This would appeal to investors who prefer a stronger growth angle which is probably the case for most institutional investors.
So, are you staying invested in Singapore banks?
If AK can do it, so can you!
I must remind myself of the most important investment idea from "Evening with AK and friends 2023." HERE.