Tuesday, June 19, 2018

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

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.

Thanks for reading.

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12 comments:

  1. Hi B,

    Telco industry is facing headwinds as traditional revenue like fix line is no longer cash cow to these companies. Look at the recent share price of M1 and Starhub. Mind to share what is your thought since I see that you are holding quite a number of M1 in your portfolio.

    ReplyDelete
    Replies
    1. Hi Anonymous

      My take on M1 is that the market is mispricing M1 ability to act and innovate as a tech disruptor which they often had the first mover advantage in providing big data plans and moving into the IOT channel. The traditional telco revenue is probably overly done and over with for the time being but I think M1 will remain much a relevant player in the 5G network we are about to embark in the next few years.

      Delete
    2. Hi B ,

      With tech its usually a hit or miss. I find Singtels warchest bigger in terms of funding the next big innovation but less nimble as its a huge corporation.

      Also in terms of exposure M1 seems more exposed to the local market compared to Singtel which is more diversified.

      M1 does seem pretty cheap now though , its price is slightly just above the 2008 post crisis levels.

      Delete
    3. Hi Verseun

      Agree, Singtel definitely has the advantage touch here in terms of size and cashing power.

      The telco will be a big miss this year and probably in the next year but it's those moments when there are really blood on the street for the sectors.

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    4. This comment has been removed by the author.

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    5. By the way , what would you estimate to be a good margin of safety for Singtel and M1.

      I was looking a 2008-2009 levels and a poor global outlook. And estimate that if people were to panic sell. It would unlikely go below this level, but this is a rather uneducated guess, as this time its more of competition and also economic outlook.

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  2. do u think starhub divest entry to electricity market will pay off in long run?

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    Replies
    1. Hi Anonymous

      I don't have a comment on starhub entry into the electricity market. Starhub is definitely expanding more horizontally into different product segment across different industry.

      Delete
  3. Electricity remind me of hyflux. Gone case.

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  4. Hi B,

    If you are looking at purely from yield perspective, StarHub current dividend yield is about 9.5%. But then again, it certainly takes a brave investor to enter telco counters now. Just too chaotic at the moment.

    Regards,
    Gerald
    www.sgwealthbuilder.com

    ReplyDelete
    Replies
    1. Hi Gerald

      Thanks, yeah good point.

      We definitely can't be blinded just by their yield but at some point everyone has got to admit that telcos are not worth $0 so the question remains when it becomes a value at some point.

      Delete
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