Disclaimer

The articles in the blog are intended for informational purposes only, with the aim of encouraging thoughtful discussions. The articles should not be relied upon as financial advice. Please read the important disclaimer at the bottom of the page before proceeding.

October 2022 Portfolio Update



Portfolio allocation as of Oct '22.

  • SG Shares: CDG, DBS, SGX, Valuetronics
  • SG Reits: Syfe Reit+
  • US Growth: BABA, INMD, PYPL, SHOP, TDOC, UPST

While reconciling last month's numbers with this month's, I realised a small mistake. My QUAL allocation for Sep ‘22 should be 8.5%, while IQLT should be 8.7%. Thus the allocations for the rest of the Sep ‘22 numbers are slightly inflated as the QUAL and IQLT numbers should’ve been higher.

In October, I continued investing aggressively and deployed a few months worth of salary. It was the highest monthly inflow for my portfolio YTD. I bought 2800HK at 15.5 HKD (avg. 22 HKD) and HSTech ETF at $0.59 (avg. $0.82) to lower my average costs for them. It may feel scary to invest in China right now, but as I don't check stock prices daily and have an extremely long time horizon, these somewhat mitigate that fear. 

For my SG positions, I bought CDG at $1.25 and averaged down on Valuetronics at $0.50 (avg. $0.54). Briefly, my reasons for investing in them are: CDG as a Covid recovery play (prefer this to SATS due to SATS' acquisition mess), operating an essential service with about 80% of its revenue from public transport (contrary to popular belief, not taxis). CDG's cash position is roughly 1/3 of its market cap and netting this off, I'm paying ~0.7x book value for the firm. Reasonably low debt (23% D/E). Operating metrics have mostly recovered to pre-Covid levels whereas the stock remains 40% lower. 

Valuetronics is mainly a deep value play with cash of ~$0.37/share vs the current share price of $0.50. Management has been aggressively buying back shares since mid-2022 and has repurchased around 4% of o/s shares. The existing buyback mandate allows up to 10% of shares to be repurchased. I may do more detailed posts on these two companies if time permits.

My portfolio allocation has shifted to become rather SG-centric this month, and that's mainly because of the strong USD and I'm unwilling to buy USD at the moment. GOOGL and ADBE remain my top targets, along with some 2021 tech darlings which have fallen to levels where you can evaluate them based on P/B ratios and look at their net cash positions vs burn rates. 

That's all for this month's update, may opportunities be abound for the final two months of 2022! For my monthly portfolio summary, please follow my Instagram Page @alpacainvestments


Random musings on the Financial Independence journey

The Financial Independence, Retire Early movement is a controversial one for sure, and I've written extensively on my thoughts on this in a few blog posts. The following paragraphs won't be a rehash of my reasons for wanting to "Retire Early", but rather, to emphasise on the "Financial Independence" aspect, which I believe is more pertinent than ever, in times like these.

Since the beginning of this year, we have seen layoffs, particularly in the tech sector, as the economy is being weaned off cheap credit. In the past month, high profile layoffs among top tech firms including Amazon, Meta and Twitter have dominated the headlines. Tens of thousands of people affected. These numbers are not merely statistics - these are real people with families to feed, with bills to pay. 

And as I've written in my previous posts, these layoffs often happen for reasons beyond our control. The deteriorating economy is beyond our control. Or a billionaire could buy over the company that you work for, and decide to sack more than half the employees. That's beyond your control as well. You could be the hardest worker in the team, the first to come in and last to leave everyday, but if the CEO decides to shut down your business unit due to "strategic reasons", you're gone as well. The point here is that very few people are truly indispensable. Like it or not, that's the reality of capitalism. The earlier you realise and accept this, the better. No one else would act in your best interests except yourself. 

Therefore, focus on the things that we can control. Live below your means. Have an emergency fund set aside for contingencies. Invest prudently and consistently. Build up streams of passive income that can one day replace income from your day job. 

To me, "living below your means" does not mean only buying second hand stuff or only buying groceries that are close to expiry dates just to get a discount. It means not dropping your first bonus on a Rolex. It means not overleveraging yourself to buy an expensive property. It means only buying a car out of necessity and not for "lifestyle" reasons.  

I know that there are "FIRE advocates" out there, who preach an extreme version of frugality to achieve FIRE. Scrimping on meals or having cup noodles everyday just to save that extra dollar. I completely disagree with that perspective. Frugality should not be to the point of deprivation. What's the meaning of life, if one is to suffer in the present, simply for a goal that's decades away?  

Expenses are only one side of the equation. Equally as important would be earning power. I've reproduced a comment I made on another forum below, on a post regarding FIRE:

"Think a huge factor is earning power. A fresh grad earning the median income of 4k and spends 1k, will save 3k per month. Another fresh grad at the 75th percentile earning 6k, could spend 2k (double) and yet will save 4k per month. What’s clear here is that the 75th percentile person will have both a higher quality of life (spending double) and also reaching FIRE faster (saving/investing 33% more). In the end it’s about how we balance delayed gratification but yet not to the point of deprivation."

Aim to be Financially Independent; whether you choose to Retire Early or not, that's up to you!


Why do I choose Dividend Investing



This post is in response to a comment I received, saying that "dividends don't matter, because your total return (capital appreciation + dividends) would be the same, if the company did not pay a dividend but instead re-invested the cash". In theory, I must say, that is indeed true. But the key assumption here would be that the company is able to re-invest the excess cash at the same rate of return. However, I still prefer to invest for dividends, and in this post I will outline my reasons for my preference of dividend investing. I have been investing for dividends since 2015 and will continue to do so. 

As many of my long-time readers would know, I am pursuing FIRE, which is to become financially independent and retire early. Thus, for someone in my mid-20s, in some ways, I tend to think like a retiree. My reasons for choosing dividend investing is written with this in mind. 

In a traditional retirement portfolio, the aim would be to sell a portion of your stocks/bonds each year to fund your expenses. But what happens in a year when both stocks and bonds get decimated, like in 2022? By the way, 2022 is the worst year in a 100 years for the 60/40 (60% in stocks, and 40% in bonds) portfolio, as per Bank of America's research. 

Assuming the market tanks by 50%, a retiree who depended on selling assets to generate cashflows would have to sell twice the number of stocks/bonds to get the same amount of cash. Let's say a retiree has just retired with $1 million in 2022, allocating 60% to stocks and 40% to bonds. Following the traditional 4% drawdown rule, the retiree would want to receive $40k a year in cashflows, generated from selling a portion of their portfolio each year. In a year like 2022, the retiree would have to sell a greater number of stocks/bonds to generate the same $40k, which would deplete their portfolio permanently.

In contrast, someone with a dividend portfolio paying out 3-4% would be less affected. While dividends may be reduced during recessions, capital remains intact and there would be no need to sell during market lows. If one simply buys dividend paying ETFs, the stream of dividends are relatively predictable.

Many people began investing during the last few years, in a period of unprecedented outperformance of Growth vs Value. Understandably, most would gravitate towards Growth stocks to chase higher returns. But let me highlight that in March 2000, during the dotcom bubble, the Nasdaq peaked above 5,000 before the crash, and it took more than 13 years before it surpassed that peak in late 2014. 13 years of being underwater. Imagine if one had bought at the peak, one would have taken more than 13 years to recoup their capital. In contrast, a dividend investor would continue to receive dividends during those 13 years, somewhat softening the pain of capital losses. Now, if we believe that Growth stocks peaked in 2021 and that higher rates will continue to hammer Growth, we could very well have to wait another decade to before we see the Nasdaq at 15k again. Dividend cushion your portfolio and returns in volatile times like this.

Another reason for going for dividend paying companies would be if you believe you can re-invest the dividends at a higher rate than the company. Some companies are asset heavy with low ROEs, but are stable dividend payers (REITs, utilities and infrastructure). In this case, it would make sense for an investor to receive the dividends, and re-invest them to seek higher returns. 

Lastly, dividends tend to increase over time. Look at the dividend history of an index like the S&P500 or even our local STI. As companies grow, they also grow their dividends. This is why I prefer dividend paying companies over fixed income instruments, where the coupons are generally fixed.

A hypothetical Dividend Portfolio

Assuming I had $1.5 million SGD today, how would I create a dividend portfolio?

My aim would be to generate $50k SGD in cashflows annually (a 3.33% yield, very conservative in today's market), which is around the median income of Singaporeans. The instruments I would consider adding into my dividend portfolio would be, in no particular order:

SCHD Schwab US Dividend Equity ETF, 2.47% yield, net of withholding tax
VEA
Vanguard FTSE Developed Markets ETF, 2.8% yield, net of withholding tax
2800HK - Tracker Fund of Hong Kong, 3.68% yield
STI ETF - Straits Times Index, 3.72% yield
S-Reit ETF - Any one of the S-Reit ETFs, ~6% yield
Singapore Savings Bond / T-Bill - 3.21% yield for Oct 2022 

I believe allocating my cash into all 6 instrument above would give me good exposure to a wide range of stocks across regions and sectors, which are well diversified. Even in a recession when dividends are expected to be cut, I believe having a diversified portfolio would mitigate the overall impact. 

Thus, in my view, if one is able to generate $40k to $50k annually with reasonable certainty, then whether the underlying portfolio rises to $2 million, or falls to $1 million, one should be indifferent. What matters is the consistency of cash flows, regardless of the market cycle.

As to how to reach that $1 million, $1.5 million or even $2 million... that's what my journey is about. Follow me on my journey to financial independence - I post monthly portfolio updates on @alpacainvestments on Instagram.