Finance Smiths

Personal finance apprentices-in-training

Distribution/Dividend Reinvestment Plans (DRPs)

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I know I have been slow with this but better late than never. Congrats to Joseph Schooling for winning Singapore’s first Olympic gold medal. It’s a fantastic achievement and something to be proud of for Singapore!

On the other hand, I feel both happy and sad for the Malaysian badminton players in the Olympics. They came so close to winning their first Olympic gold medal for Malaysia and I hope their hard work & efforts will pay off in Olympics 2020.

Sigh. It hurts to watch Lee Chong Wei lose his third consecutive Olympic badminton final and receive a silver medal. I reckon he is the most deserving Malaysian athlete to win the first Olympic gold medal for Malaysia but it is not to be this time round.

Anyway, that’s enough of a sporting update from me and I’m going to write about how August is a big distribution/dividend month for me instead. I noticed this after looking at the Dividends Upcoming and Collected sections of my SGXcafe portfolio. Always nice to see passive income flowing in.

As the amount of distributions/dividends received increase with the size of my portfolio, I have started to consider whether it’s worth participating in the available Distribution/Dividend Reinvestment Plans (DRPs). These refer to plans that allow unitholders/shareholders to automatically reinvest distributions/dividends to accumulate more stock without paying brokerage fees.

Especially with the recent changes to the brokerage fees of the Standard Chartered Online Equities Trading Platform in Singapore. In summary, there are now minimum brokerage fees to be charged for each trade and they are SGD/USD/GBP 10 on the SGX and LSE markets for Personal Banking Clients (i.e. Non Priority Banking Clients) like me.

Considering how aggressively Standard Chartered Bank (SCB) had been marketing this Online Equities Trading Platform as the only one with no minimum brokerage fees in Singapore, this turnabout was disappointing at best.

To implement a Dollar-Cost Averaging (DCA) approach with index ETFs effectively, it’s important that brokerage fees are as low as possible. Where I could invest small cash amounts previously to take advantage of market dips in times of uncertainty, I’m now forced to use larger cash amounts and have to wait for bigger market drops. It’s annoying but I will just have to adjust my investing strategy.

This also means that picking up small numbers of units/shares via the DRPs is a more viable approach now and definitely something worth considering. There seems to be no easy way to find out which of the stocks I invest in offer such DRPs other than monitoring the actual distribution/dividend corporate announcements or waiting for SCB to inform me about them.

Generally, REITs and Business Trusts usually offer DRPs and I reckon this is a good way to increase their asset allocations slowly in my share portfolio without actually using my investment cash. The problem is that my asset portfolio is over weighted on real estate now and I’m hesitant to add to my positions. Maybe when it’s more balanced in the future?

OCBC Bank offers DRPs and I’m kicking myself for not participating in it earlier in the year. I’m planning to increase my exposure to the Financial Services industry in my share portfolio as I believe it will continue to be one of the main drivers of economic growth in Singapore. And this goes beyond just the banking sector.

Given the increasing demand for healthcare services due to an aging population and general decline in health from the modern lifestyle, it was good to know that Raffles Medical Group offers DRPs as well. I only have a small portion of healthcare stocks in my share portfolio and I would like to grow this more aggressively.

I know what I’m saying sounds counterintuitive to my focus on index ETF investing. It’s just that index ETFs don’t offer DRPs and I can’t get excited about nothing. After all, this discussion is more in the context of DRPs and less about the utilisation of my investment cash.

What is Our Millennial Way?

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As I have mentioned a few times on my blog, I’m an avid reader of international personal finance blogs and websites. They offer unique perspectives on how to get out of debt, reduce expenses, earn more money, invest and achieve financial independence in different parts of the world.

Their experiences and writing styles are amazing and I constantly learn from what they have to offer. Once in a while, I find a blogger who I really connect with after reading their posts and I try to write about these inspirations of mine.

This 30-something couple’s story of reaching financial independence in Canada on CBC caught my eye one day as I was browsing international news. I was pleased to find out they are personal finance bloggers and explored their website in detail: Millennial Revolution

I binged read all their posts once I started reading because there was so much I could identify with as my wife and I are only a few years younger and we are trying to achieve the same thing! It could be the way they write as FIRECracker and Wanderer but I find myself agreeing with many of the things they are saying.

Even though their story of achieving financial freedom as Millennials is in Canada, there is much we can learn from as Millennials here in Singapore. How applicable are their life lessons to us and what is Our Millennial Way?

1. The Boomers screwed over the Millennials

One of the main points that came up was how the Boomers’ advice of getting a stable job, buying a house, be a loyal employee and retire with a pension do not work for Millennials. I don’t think the Boomers screwed us over as Millennials here in Singapore. However, I must admit that the same advice has been provided by our parents and we are starting to realise it’s no longer relevant in our generation.

More volatile economic cycles, outsourcing, increased competition, disruptive innovations and robotic technologies will lead to ever shortening job lifecycles in Singapore. I would say no industry is safe from an overhaul with the way things are going, which means jobs will never be stable and safe for our generation.  Depending only on a job for income and retirement will not work for us.

Home-ownership is high in Singapore and the property market has been sky-rocketing in recent years. However, well-built & decent subsidised public housing continues to be available to Millennials and is a good way to avoid getting burnt in the property market. It still does not change the fact that Boomers will probably profit the most from rising housing prices as they downsize while Millennials upsize.

This point about being a loyal employee struck a chord with me. It’s been my father’s advice to me consistently since I started work in 2010 despite his experience of getting retrenched multiple times in his career as a general manager of various manufacturing plants while working in China.

Every time my father gets hired to fix the major problems in the factories, he gets fired by senior management once they are running smoothly. That’s his reward for being loyal, hardworking, value-adding, not corrupt and treating the workers well.

Yet he tells me to use the same approach even now!? I respect my father highly for his work ethic but I reckon even great employees now are increasingly being treated like crap. Reason is simple – companies will always care more about profits than people.

You can feel the anger and distrust with CPF on the ground. It could be the high mandatory contributions, the way they keep pushing back the age you can access your money for retirement, or forcing you to receive a monthly sum like an annuity instead of allow you to withdraw the entire amount upon retirement. Even if we find ways to utilise CPF well, it sometimes feels like you might never get to use some of your money in it even after retiring.

2. Significance of high salary incomes

Something else that stood out was the fact that the couple had a high combined income and put in effort to lower expenses to increase their savings rate. Coupled with investment growth, they built a seven figure portfolio and retired in less than 10 years.

This goes to show how effective it can be for a salaried employee to achieve financial independence by focusing on increasing income and reducing expenses. I suspect this works even better in Singapore where personal taxes are low and dividend & interest income are generally not taxable.

Although we have achieved an above average salary income and a small investment income, the main problem is with finding ways to lower expenses and this continues to be a challenge for us. The good thing is that our work hours are decent, which leaves us with sufficient time and energy to focus on this aspect.

What’s also becoming evident is the need to have different sources of income. A high salary income can evaporate quickly nowadays when it’s so easy to lose your job. However, it takes a lot of time and effort to develop side hustles that can become your full-time jobs. Although the income is more sustainable in the long run, it’s usually lower for a long time as well. Either your partner has a high salary income to cover for you or both of you are in for a rough time.

3. Do not buy an expensive property

Sigh. This one hurts because I just wrote about buying an expensive private condo being a bad financial decision. I totally agree with the points raised about not buying overpriced property and how renting can work out better financially.

What makes this worse is that the public housing in Singapore is fantastic and subsidised. Which means we actually have viable alternatives to renting a private property especially for a young couple.

Oh well. That’s what making mistakes are for. I reckon it will set us back by a number of years but we can still recover from it. It sucks thinking about the time that will get lost but there’s no point wallowing in self pity. Just got to keep moving forward.

4. Index investing on a Dollar-Cost Averaging (DCA) approach and don’t forget to rebalance

Although we have a dividend share portfolio, we only allocate a small amount of our investment cash to it for averaging down on our current holdings. Most of it now goes to investing in our ETF portfolio although it’s been slow lately due to the run up in the equity markets.

We try to purchase both stock and bond index ETFs regularly on a DCA approach but must admit that we do market time by purchasing much more during bear markets and much less during bull markets.  Hence, the amounts invested are not as consistent as in a traditional DCA approach.

We have an asset allocation strategy for our cash, investment and retirement portfolios. However, we don’t favour rebalancing by selling the outperforming asset and buying the underperforming asset. We prefer to keep a larger cash portfolio and rebalance by buying the underperforming asset without selling the outperforming asset.

This does drag the returns on our portfolios downwards since we might have too much investment cash and end up not utilising it well. However, peace of mind and being able to sleep at night are important to us and we accept lower returns as a consequence.

5. Have a dream and work towards it

To be honest, I don’t have anything grand as a dream for now. I just want to be able to work a 3 day work week with minimal responsibilities and spend the rest of my time travelling & having fun with my wife, family, friends and possibly kids (in the future).

I also want to improve my personal finance writing skills and develop this blog. I don’t have any ambition of being a published author but would like to educate people on financial matters. This is how I see myself giving back to society. Maybe I will do more eventually but I have no idea what it would be until I actually have more time on my hands.

6. Believe in yourself

This was inherent in all of the messages the couple were sending and the lessons they were teaching in their blog posts. You must have a strong belief in yourself to achieve your goals. People might doubt & question your every move and you might make mistakes every step of the way. But the will to succeed and the not giving up matter more than anything else. We have already been shown The Millennial Way and we are going to get there with ours.

Should we have bought a private condo?

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I was inspired by My 15 HWW’s post – Is buying a more expensive home always a bad financial decision? The main reason is that my wife and I are one of those couples that bought a more expensive home i.e. Private Condominium (PC). Reading his post got me interested in whether we made a bad financial decision.

Why did we purchase a PC?

The year was 2011 and we were still working in Melbourne while planning for a move to Sydney. It became apparent that while we enjoyed working in Australia, chances are we might return to Singapore to work eventually. The centres of business activities were shifting to Asia and it made sense for us to have work exposure there in our accounting and banking fields.

If we moved back to Singapore, we anticipated a preference to stay together and not with our parents. We also took into account the possibility that we will get married then in view of the number of years my wife and I have been together.

As such, we enquired with the Housing & Development Board (HDB) on our eligibility to purchase a Build-to-Order (BTO) flat based on the qualifying monthly income ceiling of S$8,000 then. We were informed that we were not eligible due to the way they calculated the S$ equivalent of our gross A$ monthly income. Basically, it exceeded the S$8,000 because HDB included the high monthly PAYG withholding tax and the A$ was stronger than the S$ at that time.

In fact, we were also not eligible to purchase an Executive Condominium (EC) since it exceeded the qualifying monthly income ceiling of S$10,000 then as well. As the Singapore property market was picking up, we made the decision to purchase an off-plan PC in the east close to my parents-in-law’s house. We were young, impulsive, overconfident and figured the high purchase price was worth it for the following reasons:

  • Increased flexibility with the purpose as an investment or owner-occupied property from not having to meet a Minimum Occupation Period (MOP).
  • Proximity to my parents-in-law will translate into lower living costs, better support infrastructure and access to greater resources.
  • Interest rates were expected to remain low for a number of years and this will keep the monthly housing loan payment to 30% of our combined monthly income.
  • Salaries were expected to increase and the mortgage payments will become more manageable going forward.
  • Property prices should still increase slowly over time and we can sell by the time we returned to Singapore if we can’t afford the monthly housing loan payments.

How have we fared financially so far with the PC?

This is what happened over the next five years from 2011 to 2016 for each of the reasons we considered:

    • The qualifying income thresholds for purchasing a BTO flat or an EC were subsequently raised. This had little impact because our Australian salaries had increased as well and we would still have been ineligible since their method of calculation had not changed.

    • We moved back to Singapore in 2014, which was earlier than expected and the increased flexibility helped because the PC was completed soon after our return.

    • Living close to my parents-in-law has its trade-offs. While we appreciate the benefits of home-cooked meals, access to the family car and carpooling, this has translated into a greater level of involvement of my parents-in-law in our life. However, we must admit that the benefits outweigh the costs and probably more so if we decide to have kids.

    • Interest rates have climbed recently and the increase was rather quick over a short period of time. Although the monthly housing loan payment is still within 30% of our combined monthly income, there might be problems if the interest rates rise much further and/or our income drops significantly.

    • Although our salaries have increased over the years, lifestyle inflation means the housing loan payments have not become more manageable. Nevertheless, we have always tried to keep our housing expenses (whether rent or mortgage payments) to within 30% of our combined monthly income.

    • The market value of our PC is only slightly higher than our purchase price and it’s not easy to sell in a depressed market.

As you can see, we were really fortunate not to have this financial decision of buying a PC blow up in our faces. We made decent money in our jobs and have not yet been retrenched over the years. Our efforts to maintain a savings rate of 30% – 40% have translated into a respectable asset portfolio with time despite lifestyle inflation. However, the large mortgage and potential for exponential increase in monthly housing loan payments continue to be a cause of concern.

In conclusion, buying a PC was not a good financial decision but the costs were mitigated by factors within and beyond our control. We can’t make too many of these bad financial decisions and we might not be so lucky the next time.