Highlights

A Path to Forever Financial Freedom

Author:   |   Latest post: Wed, 20 Jun 2018, 11:12 AM

 

If You Are Into Dividend Investing, Now Could Be Your Chance To Get Your Higher Hurdle Rate

Author:   |  Publish date: Wed, 20 Jun 2018, 11:12 AM   |  >> Read article in Blog website


5% Dividend Yield.

That was the hurdle rate I was aiming for in a long time for my portfolio since I started investing.

We have been living in a ferociously low interest rate environment almost for the whole decade that we struggle to find a good company that can yield a decent 5% yield for the longest time.

And so I worked on my early retirement based upon the 5% yield hurdle rate and work backwards to find out how much capital I needed to generate that.

That magic number was originally at $1m, but it was always a play between moving targets since there are so many variables within.

We have seen plenty of fiscal policy tightening in the last 1 year where interest rate starts to spike and things start to move into the unchartered territory, at least within the past decade.

The new generation, including myself, is rather unfamiliar in this territory and there are times when we started to doubt if this is real, or fear that comes setting in.

First, you have your mortgage variable home loan starts creeping up, followed by a couple of hikes in your fixed deposits.

Then of course, you would have your corporate bonds offering higher YTM and subsequently as the expected return increases, you wanted something higher yields for your equity companies.

Simply put, what was once 5% yield is enough for me, now I wanted something higher.

I wanted to up my hurdle rate according to market conditions and follow the rest of the herd using the same requirement.

Sentiments in the market are never going to be logical following the requirement set under the economic conditions so we're always going to see some mismatch between price, value and opportunity.

For example, Singtel price has ranged at about $3.50 back in 2014, and then went all the way up to $4.50 in 2015 before reverting back to where it is today at $3.16.

Sure, we've seen their overseas investment like Bharti posted their first growth phase year on year back in 2015 before losing their momentum growth today but the question remains if the valuation accounts for that growth back in 2015 when investors bought it at $4.50 as compared to say today.


Of course, it is way too simple just to account for that nature and ignore the outlook of the telco industry but my point is if investors take that into account when buying at the peak with optimistic growth outlook prospect.

What was once a 3.2% yield back in 2015 is currently today a 5.5% yield in 2018 at current price.

I think there's opportunities all across the markets to get your portfolio to a higher hurdle rate and a dividend yield that are sustainable for a long time to come.

If you are into dividend investing, it could be an exciting time ahead. 

At least for me, I am happy enough to get my portfolio up from an original 5% hurdle rate to a 6.2% yield now, and possible even higher as I try to seek good companies yielding decent sustainable yield for my future retirement.

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Guest Post - Real estate developer (with case study at June 2018)

Author:   |  Publish date: Mon, 18 Jun 2018, 09:13 PM   |  >> Read article in Blog website


We have our regular contributor CK who often writes good insight into the industry he has an expertise on.

The last contribution he has is back almost a year ago during Aug in 2017 which you can find the link below:

http://foreverfinancialfreedom.blogspot.com/2017/08/guest-post-cost-of-flour-more-than-cost.html

This is a continuation to the update this year in Jun of 2018.

The business model for a real estate developer is that of building and selling of properties. Hence, the key performance metrics of a developer is the ability to procure all raw materials (land, construction cost etc.) and sell to the end consumer at a reasonable margin (or otherwise known as the developer margin). Developer has to either possess the ability to procure raw materials at a cheaper price or have the ability to price their development at a higher price. Sounds simple?

The typical business cycle of a developer:

Purchase of land which can be done via Government Land Sales or en-bloc.

Land cost is often the most expensive component of property development cost in Singapore. If obtained at an excessive level, it could render the whole development unprofitable. Hence, for property investor (be it investors on the equities of property developer or physical real estate), it would be useful to keep track of how much did the developer pay for the land (often quoted on a dollar per square foot basis).

See below for a scenario analysis on a property development undertaken using some high level assumptions:

Digging back on a guest post done for 3Fs (aka B) about a year back, I did an analysis on the the land cost paid by The Garden Residences (By Keppel and Wing Tai) and Affinity at Serangoon (by Oxley) and price sold for their respective launch in June 2018 based on URA data



Based on the "Bread to Flour Ratio", it would seem that Oxley is getting better margin compared to Keppel Wing Tai.

Lets dive in greater detail by constructing a project profit or loss statement on the basis all units are able to be sold at the average price psf achieved to-date:

Assumption of cost of construction psf: $500 psf

Assumption on cost of financing: 3%

What does that translate in the profit and loss for the whole development?




The below would be the return on equity projection for the 2 developments.



The high level return analysis is based on the following assumption: 

1.) Equity is based on 20% of land cost 

2.) The developer is able to maintain their pricing for remaining unsold units 

3.) Cost of financing is based on 1 year financing cost. Financing cost will increase if there is slowdown in sales on the assumption the developer use the sales proceeds to repay borrowings undertaken. 

4.) Cost of sales (i.e. agent cost) not factored in. Typically between 1% to 2%. 

5.) The average development period is 3 years from date of obtaining land. 

6.) There are no further unexpected increase in construction cost. 

7.) The development managed to successfully 'clear stock' to avoid ABSD charges which amount to 15% of land cost within 5 years from obtaining the land.

Based on the June 2018 URA data both developments are about 9% sold which is relatively low and reflect the cannibalisation of buyers eyeing for property in the same area. This potentially reflect buyer's insensitiveness towards other factors within a development (e.g.reputation of developer, finishing, layout) compared to the location. With the influx of launch coming through from the huge en-bloc output from 2017, it is possible that the developers of Garden and Affinity cannot 'clear stock' without 'cutting price'. 

Being pragmatic, I would not bet that the developments will be able to rake in the profit numbers shown above. In fact, I will be more concern on the potential worst case scenario where the developers are slapped with ABSD 4 years down the road shown in the table below:


The above charges if eventuates will certainly caused the returns to suffer drastically and probably result in Garden making a loss.

Using the above case study, I would like to summarise the key learning points:


  • Cost of land paid relative to comparable plots is indicative of the project profitability 
  • Excessive supply situation in the vicinity will result in slower sales 
  • General rise in market prices will result in developer being able to increase price at subsequent phases of launch 
  • Cost of financing could impact the project profitability 
  • Cost of financing could be capped when developers use sales proceeds receive to repay borrowings 
  • Ability to launch a project quickly will also alleviate financing costs incurred

Author's take on current real estate market

Personally, I feel the slowdown in sales of new launch at Garden and Affinity is significant. The property bull cycle over the past year has been driven primarily by market sentiments with developers setting record bids with each government land sales or en bloc. The myth that "developer must sell high because land cost is high" is a good sales pitch but must not be the primary indicator of property purchase. The unwillingness of buyers biting the high price that developer is offering at Garden and Affinity provides evidence that other factors such as comparable property pricing, supply situation or simply market forces do play a part. I have no crystal ball over how the property market will pan out. But what I do know is that 4 years down the road, unsold developments from the record en bloc season of 2017/2018 will be due for their ABSD. In such a situation, it will be a more attractive buyer's market assuming other factors remain the same. In the meantime, interested investors could use the above metrics such as "Bread to Flour ratio" and percentage of units sold to monitor the specific developments and its impact to its owners if you are vested in property stocks.

Thanks to CK for his contribution on the post.

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"Jun 18" - SG Transactions & Portfolio Update"

Author:   |  Publish date: Tue, 12 Jun 2018, 02:21 PM   |  >> Read article in Blog website


No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
Vicom
27,000
6.05
163,350.00
24.0%
2.
Frasers Logistic Trust
126,000
1.05
132,300.00
20.0%
3.
M1
75,000
1.68
126,000.00
19.0%
4.
Far East Hospitality Trust
125,000
0.65
  81,250.00
12.0%
5.
Ho Bee Land
30,000
2.45
  73,500.00
11.0%
6.
Starhill Reit
100,000
0.68
  68,000.00
10.0%
7.
Singtel
8,000
3.24
  25,920.00
4.0%
8.
Warchest
-
-
    1,000.00
1.0%
Total
671,320.00
100%

It is time for another update for the month as we move towards the half year mark, a half-time update to reflect upon how we did in our portfolio.


I'm currently on a 2 weeks break away from work to spend more time with my parents so I have quite a bit of time to blog these 2 weeks.

The big news this month is on the Kim-Trump Summit which will take place in a historic event on the 12th Jun. 

I've been following the news quite closely to see what kind of outcome can they agree and compromise upon with one another.

This month's portfolio did not see much changes.

I participated in the FLT rights offering which I blogged over here.

My entitlement was 14,500, together with my family's which I then applied for an excess of 3,500 at a discounted price of $0.967.

I received 2,700 of those excesses which means it was in the money right away of about 10% return. Really a decent deal.

At a slightly higher than 7% yield, I think this is one Reit that I will keep for the long term as the Reits still continuing to grow.

I have also divested my Tuan Sing at about 10% loss after deciding to switch them to Singtel, which I bought at a trance of around $3.33. The decision was made as I am attempting to switch to a more yield portfolio than growth and it aligns with my strategy for the longer term.

Singtel (and the other telcos) continues to struggle and I should be adding to my position slowly each month with new capital injection.

I also participated in a very small bid towards the Astrea Bond which is immaterial to the portfolio, and will only know by next week. I have no plans to make this a big part of my portfolio but rather switching some emergency funds and warchest into a higher yield right now.

The number of companies remained at 7 equities at the moment, and I will be looking to gradually add this to 10 by the end of the year.


Net Worth Portfolio

The portfolio has increased from the previous month of $657,225 to $671,320 this month (+2.1% month on month; +10.0% year on year).

This is the fifth time in the six month this year that the portfolio is breaking a new all time record high. Most of the gains are due to the capital injection that I received from my dividends.

While it is at a new record high, I am rather disappointed that it has not done as well as I had expected and the year on year increase is getting a lot slower these few months.

The portfolio has year to date this year returned 0.92%, which has underperformed the STI at 2.85%, though I am very confident that by year end I'd be able to catch STI up by surprise.

Family Portfolio

This is to update the part of family's portfolio which I managed together with mine.

The goal is to ensure the portfolio grow at a steady rate especially the children's portfolio until they turned semi-adults, which I will then have it transferred to their own account.

1.) Wife's Portfolio


She decided to reinvest the dividends received for the FLT back into the funds and I've allocated 500 shares for her portion.

No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
FLT
13,500
1.05
14,175.00
70.0%
2.
Sasseur Reit
8,000
0.77
  6,160.00
30.0%
Total SGD
20,335.00
100.00%


2.) Baby B1.0 Portfolio (Age: 4 years and 2 months)


I have also reinvested the dividends received for FLT back into the funds for an additional 500 shares.

This is based on a very long term play so I believe the portfolio will grow together with FLT over time.

No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
FLT
13,500
1.05
14,175.00
86.0%
2.
Singtel
700
3.24
  2,268.00
14.0%
Total SGD
16,443.00
100.00%


3.) Baby B2.0 Portfolio (Age: 1 year and 5 months)

Similarly, I've reinvested the dividends received back into the funds as I've allocated 200 shares to it.

No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
FLT
3,200
1.05
3,360.00
52.0%
2.
Singtel
1,000
3.24
3,240.00
48.0%
Total SGD
6,600.00
100.00%

4.) Mum's Portfolio

For my mum's portfolio, she prefers to take cash so I will be transferring $220 to her.

No.
 Counters
No. of Shares
Market Price (SGD)
Total Value (SGD) based on market price
Allocation %
1.
FLT
6,000
1.05
6,300.00
100.0%
Total SGD
6,300.00
100.00%


Final Thoughts

The portfolio still continue to grow very slowly each month through sufficient capital injection, though the returns this year have not helped much.

I'm still confident that the second half of the year will be a lot better and the objective is to continue looking for dividend companies that has a relatively undervalued valuation.

The next upcoming dividend would be mostly in Aug or Sep, so the bulk of those income would be put to good use by then.

Meanwhile, it's business as usual.

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Not Only Expenses, You Also Have To Take Care Of Your Income

Author:   |  Publish date: Sun, 10 Jun 2018, 03:58 PM   |  >> Read article in Blog website


There's been an ubiquitous edition of articles on how you should take care of your expenses, but there were little mention of how you should also be taking care of your income, especially bad income.

The bad income is of course very subjective and it differs in definition from one individual perspective to another.

One way to differentiate "bad" income from "good" income is to quantify it through how some income is taxed more favorably than others.

For the majority of the people, income derived from employment or trade business are generally considered "bad" income because they would attract a chargeable tax to that income class. This is exception to employment income that you derived overseas assuming you are seconded there for a few years (you are subjected to the overseas tax legislation though).

Property income that you derived from renting out your premise would also be subjected to income tax, though you are able to deduct any allowable expenses off from the gross.

There are a few income categories under the Singapore tax jurisdiction which can be considered as "good" income.

One of them is dividends or interest income, which under the one-tiered tax system, is today exempted from the hands of the shareholders.

If you are also getting a windfall from either strucking lottery winnings, gamblings or also retrenchment package, they would also be exempted from tax as they are considered non recurring in nature.

Warren Buffett even voiced out his opinion on the tax legislation that he paid less federal taxes than the staff working in Berkshire who is paying out of the payroll income taxes more than him, which it doesn't make sense.



Another way to differentiate "bad" or "good" income can also come in the form of the number of hours spent to achieve that gross amount of income.

For example, if another employer offers you a 20% increase in your income but you have to spend a correspondingly 20% increase in your time spent, that may not qualify you as an incremental increase of "good" income.

The best incremental increase of "good" income is earned by spending lesser efforts over time, even if the actual amount of income earned remain the same.

If I had originally started by working 5 days/week and earning a gross income of $3k/month but today reduced to working 4 days/week and still earning the same gross income, I would considered that as a "good" incremental increase of my income.

A good friend of mine, Sim, retires early in his late 40s after accumulating sufficient "good" income through his portfolio of dividend stocks and decided to abandon his "bad" income so he can spend more time with his family. He's still getting richer over time than most of us even when he spends lesser time in the office than most of us.

I believe all of us have a role to play to take care of ourselves, instead of having the government or anyone else to look after us. 

As much as you want to be a good law abiding citizen by paying taxes and contributing to the economy, or you could argue that you have passion and loyalty in working for the employer that you've been staying for over 20 years, you owe to nobody but yourself to answer when you get older. If you are the head of the family, that responsibility just quadruple to make sure you have enough for your family.

If you'd like to learn how you are able to accumulate "good" income through investing, we have an upcoming seminar for the Investors Exchange that would discuss on how you are able to do that.

You can find the link here at BIGScribe.

The last update is there's only 49 seats left for the early bird discount.


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What Does It Means When Share Price Stays The Same After 10 Years?

Author:   |  Publish date: Wed, 6 Jun 2018, 08:30 PM   |  >> Read article in Blog website


I received an email from one of the reader which I thought it was interesting to share and further ponder around on the topic.

He asked me a very beginner question because he is relatively new to the market.

He asked me whether a share price might stay the same after 10 years even if the company continues making profits in that 10 years.



Logically speaking, if the company continues making profit, the share price should grow in tandem after 10 years, assuming everything else constant. It is almost illogical that the share price continues to be the same after 10 years.

The Efficient Market Hypothesis that we learnt in school taught us that markets are efficient. They reflect all new public information as well as the revised numbers announced after results. This means that if the company continues to make a profit, then the profits would flow back to cash in the assets and retained earnings in the equity and it would strengthen the balance sheet, hence the share price should reflect stronger in that very aspect.




In reality, we know that might not always be the case.

One factor is that sentiments in the market play a big part especially when the blind leads the blind and this demand continues to push the market upwards or downwards in momentum, everything else fundamental constant. 

This is called herd investing.

During the cusp of the Great Recession in 1929, Joseph Kennedy reflects a story how he at that time heard tips from everywhere including his very own shoe shine boy. He sold everything he owns that very next day.

Sentiments also drive earnings multiple higher in market during the bull or bear run. For example, during a strong wave of bull run, market might assigned a technology company 50x earnings multiple to that company but only 10x multiple during a bear market.

The second factor why share price might remains the same after 10 years can also be attributed to the way they structured their financial engineering books. Some companies might generate an earnings yield of 10% but distribute dividends that are higher than that for example 11%. In that case, the company would have to either fund it via borrowings or issue an equity at some point as a return of capital. This weaken the balance sheet over time and is an example of a poor management capability.

To make things more complicated, there are many companies which has a dividend policy that are attributed to a certain percentage of their dividend to earnings. For example, Company A might have a policy to distribute out at least 80% of the earnings as dividends.

The problem with this as investors might already know is that earnings might not necessarily equate to cash flow, let alone taking a free cash flow into account.

So going back to the same example if you have a company that has an earnings yield of 10%, but gives a dividend yield of 9%, yet the cashflow yield is only 7% and free cash flow yield of only 6.5%, then sooner or later, the company would be facing similar cashflow issues and runs into debt.

The idea why the EMH hypothesis stays true is because it assumes that companies that make profits would plow back its profits into the balance sheet as cash which it would then use it as an opportunity to further invest into projects with an EPV that are greater than zero. In that hypothesis, it assumes that the markets are efficient, the opportunities are readily available and the sky is blue.

And if the share price remains after 10 years, then perhaps it is a sign that the management has not done a very good job at improving shareholders value which in actual sense the only most sensible thing for them to do to increase shareholders value is to payout 100% of their cashflow earnings.

Easier and happier for both parties.

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The Looming Dark Side of Retrenchment

Author:   |  Publish date: Mon, 28 May 2018, 09:38 PM   |  >> Read article in Blog website


My company had recently announced an undertaking restructuring exercise which would impact a few functions and one of the functions would be in my department.

As a shareholder and someone who's been investing for some time, I didn't see this much as a surprise.

Companies have the tendency to exercise their restructuring plan every once in a while. The idea is to identify productivity savings and reduce manpower costs and above all increase shareholder's value by delivering a higher earnings per share.

My company tends to have this exercise roughly once in every 4 years, so long timers would have seen this coming. It feels sort of like a correction in the stock market that comes once in a while, and all as part of a company's life cycle.

The good thing about the company policy is it pays out a package equivalent of 1 month for every 1 year of service, up to the maximum of 12 months. So if you have been serving in the company for 10 years, you'll get a 10 month package.

The other good thing about the company is they will extort every measures to ensure they will find a role for the employee until the last stance, as part of the Group's mission and goodwill towards their employees as well as to avoid the third camper scenario I would talk below.




In the normal stench of scenario, there are usually 3 campers.

The first camper belongs to the majority who are worried about the loss of their income that might disrupt their lifestyle, especially those with high mortgage loan, other debts and children who are young.

The second camper belongs to the minority who are actually looking forward to receiving the package because they are at the near end of their working life. These are usually those that are typically range in between 55 to 60 years old and have worked in the company for donkey years. The severance package will serve a good sayonara figures to tie down the rest of their retirement lives. Hopefully, together with the savings they have, they are able to retire earlier than expected and enjoy the rest of their retirement lives.

The third camper belongs to even the lesser minority who are actually also looking forward to receiving the package either because they are financially stable, have own outside ambition or a housewife. These are the group which typically "doesn't mind" if they receive the package because they can either take a break, reshuffle or have plenty of other options that are flexible.

I've seen a few of my colleagues who are under this third category and it is easy to identify them as they looked calm yet eager to find out the circumstances.

My boss had a talk with me a few times and had assured me that my job is safe, though he is unable to confirm the role which might change and evolve. He can't say the same for my other colleagues though who are in the first camper scenario, sadly.

The irony about this whole thing is I had actually preferred to be in the third camper and it would mathematically benefit my financial situation had I been offered the package instead. I have been in the company for 7 years, so that would entitled me 7 months package.

I had subtly and intentionally hinted to my boss but this exercise does not allow voluntarily redundancy so it doesn't work in this manner.

Still, nothing is confirmed yet so it'll be plenty of assessment and transition between now till the end of the year until things are clearer.

I'll have plenty of direct influence because of the contribution of the assessment from my part but it'll be nothing more than a task which every company has to go through.

This is probably the real truth about working in a company as an employee.

The looming dark side of retrenchment will always be there.

You just have to be prepared when it comes your way.


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