Market - Oct 2013

It is time for another market update. Following my August post, I decided not to invest in SingTel and Capitamall and leave my portfolio as it. This did not have to do with the two companies' fundamentals, but rather with general market conditions. Although I have accumulated quite a significant amount of cash reserves, I am of the view that markets have already gone too far. I will therefore stay invested, but will not add any major positions to my portfolio for now. 

In the current environment, there are still no alternatives to stocks, but I feel that I was long too late and already missed the biggest part of the rally. In my view, the risk of a market correction is too high and it outweighs the bit of extra return from another investment.

Let’s have a look on the stock indices of my core markets. What has happened since August?

There were German elections in September with the outcome of a great coalition between Christ Democrats (Merkel) and Socialists. Both parties support the EURO policy and will hold a large voting majority (504 of 631 seats) in the Bundestag. Any objections from opposing parties (the Greens and left-wing communist party with together 127 seats) will have no impact on the country’s politics. 

Markets are relieved that the newly founded German anti-EURO party did not make it into the Bundestag. Just like the Liberals, it remained below the 5% threshold with still remarkable 4.8% of total votes. I would have liked the idea of having one party in the Bundestag questioning the EURO policy – even though this would have caused market consternation. 

Anyway, it is how it is and as long as there are no exceptional bad news from Southern Europe, the DAX will remain dependend on the Dow Jones which in turn is stimulated by the Fed policy. 

This leads us to my next core market, the US. After rumors about a war conflict in Syria, Obama follows a diplomatic approach and now relies on the U.N. to put Assad’s chemical weapons under international control. For the moment it seems as if the risk of a new war conflict is banned.

What about the Fed? Well, as if I already felt it in my last update, the Fed delayed bond tapering as it believes the US economy still needs support. In the end, everything will stay as it is. Nobody expects a slow-down of the USD 85bn monthly stimulus to the US economy still within 2013. For the moment, it seems likely that the Fed stimulus will be maintained for a much longer time. Even if it will be reduced within 2014, I wonder how much longer it will take to completely end it. And more importantly, how will markets react when the Fed announces it will cut or even end the stimulus? 

Another factor that has caused market fears was the US government shutdown in October and the potential of a US sovereign default. I did not even had this on my agenda and I guess most people already forgot the last time when a similar situation occurred back in April 2011. Although almost no one expects an US default to occur, there is still no visible solution to the US sovereign debt problem except for ‘kicking the can further down the road’ to the next deadline and hoping for an economic recovery until then. The next funding deadline is Jan. 15, 2014 and the next debt ceiling deadline is Feb. 7, 2014. In the meantime, a congressional committee will work out a longer-term budget deal. It seems as if global markets can rest until then.

Since start of September there was also a remarkable upward correction in the STI and a good opportunity to re-buy cheap has passed. Like markets in Europe and the US, the STI reacted negatively to rumors about tapering of quantitative easing and a pending attack on Syria. Bad news about flattening growth in emerging markets and asia probably also had some impact on the performance. I guess similar to the DAX and DOW JONES, the STI has recovered in the meantime due to the recent positive news trend.

Having said this, it is quite fascinating to see how interdependent all markets are and how important the US monetary policy has become for the world economy. It is this market property which makes me a bit thoughtful about the overall developments. Do prices currently really reflect the intrinsic value of stocks or has everyone just become really desperate about the lack of alternative investment opportunities?

Let's see where the journey of unprecedented loose monetary policy leads us by the end of the year. It seems as if we have new market records in front of us, but the key question is for how much longer... 

As usual, the media associated the tapering of QE and the pending attack on Syria as the causes for the correction. - See more at: http://www.bigfatpurse.com/2013/09/singapore-permanent-portfolio-update-aug-2013/#sthash.CZVmwtil.dpuf

ETFs - Selection

When I graduated from university and started my work life back in 2010, I decided that some part of my monthly salary should be held back for my own retirement.

Sadly enough, but in Germany we have a birth rate of 1.36 children per woman, even less than in Japan with 1.39. As a consequence, there are less employed people who have to finance the older generations’ pensions. This development is reflected in the ratio of employees to retirees which will be close to 1.00x by the year 2040. Some decades ago, this ratio has been in the area of 3.00x meaning that 3 employed workers used to finance the pension of 1 old retiree.

The state rent system of past decades used to be well-funded by masses of younger employees so that retirees were almost guaranteed a big part of their last salary as perpetuity. As an example, in the 70ies retirees were paid almost 70% of their last salary by the state rental system. In the meantime, this figure came down to 50% and is expected to further decline to a level of 30% for 2040 onwards. 

Being confronted with these figures, younger people should quickly come to the conclusion that they cannot rely on the state system alone and need to provide for the future via private pension plans. That's where the capital market comes into play.

I like the idea of directly investing part of my monthly salary in a private and flexible pension plan. When I started to inform myself about pension plans in 2011, I was not following the idea of dividend investing alone. At that time, I decided to invest in funds which should be both partly dividend-oriented as well as growth-oriented, exposed to mature as well as emerging markets.

I read many articles about fund investing and ETF investing and decided that I prefer ETFs towards regular funds as I think that the biggest part of the overall portfolio performance stems from the cost average effect, i.e. buying cheaply during stock market dips and thereby benefiting from market cycles whilst enjoying much lower administration expenses and low to none management fees.

When it comes to ETF investing, there are certain things to consider before choosing the right ETF for one's needs:

1. A) There are "swap-based" ETFs which replicate the performance of an index without holding every single asset of the index (it gets complex and costly if the ETF has to buy each 500 stocks of the S&P 500 for example). For Deutsche Bank ETFs (DB X-Trackers), swap contracts may only be used for max 10% of the overall portfolio value. Theoretically, the swap Contractor can be any financial institution which exposes the investor to a potential “default risk” of the Contractor. This sounds risky, but in case of DB X-Trackers the Contractor is Deutsche Bank itself which, in my view, reduces default risk significantly (if Deutsche Bank goes bankrupt, the worldwide banking system will be probably do so as well).

    B) Then, there are ETFs which use a “full replication” approach, meaning that the ETF holds the exact same assets in its portfolio like the index it is replicating (an ETF investing in the DAX would therefore hold all single 30 stocks in its portfolio in same weights like the DAX). 

2. There are ETFs distributing dividends in cash and there are ETFs directly re-investing dividends (without any potential tax impact on dividends).

3. There are ETFs in different currencies. Diversification across the main currencies such as USD, EUR, GBP, SGD, etc might be advantageous.

4. Market capitalization is another important criterion. The larger the ETF, the more liquid it stays in principle. This can enable the investor to quickly sell down even in a crisis scenario.

5. Diversification across sectors and geographies. In general, every ETF should provide information on the sectors and countries it is invested in thereby enabling the investor to calculate its overall portfolio exposure to sectors and countries.

6. Last but not least, one should also consider choosing different ETFs from different ETF providers to again enhance diversification.

Based on all these criteria I chose the following ETFs in which I invest €200,- on a monthly basis

*DB X-TRACKERS STOXX GLOBAL SELECT DIVIDEND 100 ETF 1D        

*DB X-TRACKERS MSCI AC ASIA EX JAPAN TRN INDEX ETF 1C

*DEKA MSCI EUROPE UCITS ETF

*ISHARES MSCI EMERGING MARKETS

Watchlist - Aug 2013

See below my current watchlist:

Some stocks I am more interested to invest in than others and therefore I am more frequently following price developments and publications of these stocks.

This table does not imply that I would like to add all of these stocks to my portfolio. It is simply an overview of all the stocks I currently find worthy to look at.

Market - Aug 2013

Not too much has happend in the stock markets during the summer period since my introductory post in June:

After the Fed stated it is likely to slow down its bond-buying programme later this year, markets fell back to 7,700 (DAX) and 14,700 (Dow Jones), but recovered close to or even exceeded

recent all-time highs (DAX: 8,530 / Dow Jones: 15,650) in July. 

While politicians see the US economy continuing back to growth supported by decreasing unemployment rates, the situation in good old Europe is way more diverse with still unbearable unemployment rates and debt burdens in "the South" and more stable but stagnating economies in "the North". In addition, the situation is exposed to potential political shocks like Germany's elections in September or upcoming debates about a 3rd bail-out package for Greece. 

Overall, it seems as if the US is better off and politicians already see the Fed starting to draw down on the amount of bonds it buys very soon.

I have my doubts about the recent recovery in the US and like few years ago I ask myself today how and when Western economies (including Japan) will ever start to repay debt and de-leverage. Until there is no strategy to reduce debt, there is little reason to believe that the US recovery is sustainable and that the Fed will stop its bond buying programme in the near future. 

At the same time, there are recessionary fears in the Emerging Markets and Asia: Asia’s role as world’s growth engine seems to be waning and economies across the region weaken with investors pulling capital out of the markets. This development is reflected in the recent downward trend of my 3rd core market Singapore and its Straits Times Index (STI).

At a currently favorable EUR/SGD exchange rate, this could be a good opportunity to increase my Singapore exposure by solid positions like SingTel (4.78% yield) and Capitamall (5.42%  yield). With a potential Syria war conflict in mind, I will stay tuned and watch the markets in the next days, keeping in mind that I could also catch the famous falling knife... 

Others - Dividend Growth Investor's article on Seeking Alpha

Yesterday evening, I went into a fine beer garden and got completly shit-faced. While I was totally unproductive in the morning, my blurry mind slowly recovered in the afternoon when I came across a very nice article which was written by Dividend Growth Investor and posted on Seeking Alpha. I find this article very inspiring and therefore I am sharing it here. It summarizes very well how dividend-investing works and what the advantages are, especially if you are starting at an early age and continously stick to your strategy:

"Imagine your perfect day. You wake up when you are rested, without the need of any alarm clocks. You then do some working out , followed by having a nice healthy breakfast. You then read at your leisure, have a lunch later in the day to beat the 11:30 - 1 pm crowds, and then review your brokerage accounts. You notice dividends from several companies are deposited today, and you decide to transfer them to your checking account. You check for any major items concerning your portfolio holdings, and spend a few hours researching a new dividend stock.

After that you get more time to concentrate on your activities, be it volunteering at the local homeless shelter, mentoring high school students, learning a new language or simply catching up on some good books. Later that day, you might decide to enjoy a few with your mates/gals. This dream is brought to you by dividend investing.

This is my retirement dream in a nutshell. The reason I started Dividend Growth Investor blog in 2008, is to write down ideas on how to make it happen. I believe that dividend growth investing works for all investors, regardless of their age. However, I do realize that older investors might have a preference for higher yielding stocks, while youngsters like myself can afford to build portfolios across the yield spectrum.

One of the most common misconceptions about dividend investing, however, is that it is not a good strategy for building your nest egg, and therefore it is not suitable for younger investors. Being a youngster myself, I (not surprisingly) disagree.
Younger investors are typically told to take a lot of risks early on, because they have time to recuperate those losses. I find this saying to be very dangerous for young investors. The problem is that taking risk is important, but it should not mean gambling. Investors should only be taking on large risks when they have a strategy with positive expectancy of a positive return, while risk is minimized. If you invest in penny stocks, social media stocks, or if you bought dot-coms during the tech boom of the late 1990s, you took huge risks but you were likely making concentrated gambles. There is a cost to gambling, because losing your entire nest egg of $10,000 at the age of 24 means you will be poorer by $800,000 by age 70. This calculation assumes a 10% annual return for 46 years.

In contrast, with a typical dividend growth strategy, you get a slow and steady approach that will lead to a monthly passive income that will pay your expenses in retirement. Starting out early will be beneficial, because you would gain the necessary experience through trial and error, and find out the nuances that work out for you. This would make you successful, and ensure that you maintain your success in investing. A big part of investment success is not losing too much in your investment career.

With this dividend strategy, we are focusing not on net worth per se, but on target annual dividend income. If your goal is to have a net worth of $1 million dollars, but you end up investing it in a relatively illiquid asset such as a personal residence, you might not be able to retire entirely on it. In some parts of the U.S., you might have to pay $20 - $30 thousand in annual property taxes plus paying for upkeep, maintenance etc. If, instead, you had a rental property generating $4,000 in monthly income or a portfolio of dividend stocks generating a similar amount, you might be set for life.

I believe that a new investor who does not have a lot of money today but who plans on accumulating their "financial nut" over the next years will be perfectly able to utilize dividend growth investing. With this strategy investors turbocharge the dividend income growth of their portfolios by putting money to work every month in stocks that regularly boost dividends, and then reinvesting those dividends selectively.

Since 2008, I have been on a mission to build up my portfolio income. Every month, I save an amount of money that I deposit in my brokerage account. I scan the market for investment opportunities all the time, followed by analyzing prospective investments. I identify dividend stocks for further analysis either by running my screening criteria against the dividend champions or contenders lists, by looking at weekly list of dividend increases as well as through interactions with other investors and the general method of my inquiry into business.

I do a complete stock analysis of each company I find interesting, in order to gauge whether the company in focus has any competitive advantages, pricing power and whether there are any catalysts for further expansion in revenues and profitability going forward. I focus on companies that can grow earnings over time, which will provide the fuel for future dividend increases. A rising earnings stream is also positively correlated with an increase in stock prices. You can have your cake and eat it too with dividend growth stocks.

My goal is to acquire the quality companies identified for purchase at attractive valuations. Entry price does matter to an extent, because a lower price provides a higher margin of safety in the investment and is equivalent to a higher dividend income. Of course, if you plan on holding stocks for 20 - 30 years however, it would not really matter whether you purchased Johnson & Johnson (JNJ) at $70/share or $75/share. If you overpay today however, it might mean that your returns in the first five years might be below average, until the growing earnings result in a valuation compression that would make the stock attractively valued today.

For my personal portfolio, I try to generate annual dividend growth in the 6-7% range on aggregate. My portfolios also yield approximately 3.50% - 4%. I achieve these aggregate figures by stacking three different types of dividend growth stocks, for maximum results. So far, I am able to cover approximately 50% of my expenses from my dividend income.

A few good picks include:

Coca-Cola (KO) engages in the manufacture, marketing, and sale of nonalcoholic beverages worldwide. This dividend champion has increased distributions for 51 years in a row. Over the past five years, Coca-Cola grew distributions at a rate of 8.40%/year. Currently, the stock is trading above the 20 times earnings limit I have set for myself, but yields a very respectable 2.80%.

Phillip Morris International (PM) manufactures and sells cigarettes and other tobacco products. The company has managed to grow distributions by 13.10%/year since the spin-off from parent Altria Group (MO) in 2008. I like the economics of the tobacco business, without the liability stemming from doing business in one country. PMI's revenues are generated outside the U.S., and therefore are not dependent on a single country's onerous laws on smoking. Currently, the stock is trading at 16.60 times earnings and yields 3.90%.

Kinder Morgan Inc (KMI) is the general partner of Kinder Morgan Partners (KMP) and El Paso Pipeline Partners (EPB). It also owns limited partnership interests in KMP and EPB. The most important asset is the incentive distribution rights structure, which provide for a 50% share of any future distributions growth over a certain threshold for KMP and EPB. Given the growth projections for energy assets in the U.S., and Kinder Morgan in particular, this stock can achieve high single digit dividend growth for at least the next five years. Currently it is yielding a very attractive 4.20%.

Procter & Gamble (PG) engages in the manufacture and sale of a range of branded consumer packaged goods. This dividend king has increased distributions for 57 years in a row. Over the past five years, Procter & Gamble has managed to boost distributions at a rate of 12.20%/year. Currently, the stock is trading at 17.20 times earnings and yields a very respectable 3.10%.

Let's see how a portfolio stacks, where a young dividend investor puts $3000/month in 4% yielders that grow at 6%/year. After five years with this approach, you would be earning $750 in monthly dividend income. Ten years after starting this strategy you will be earnings $2,000 in monthly dividend income. Fifteen years after beginning your dividend investment journey, you will be making almost $4,000 in monthly dividend income. This slow and steady approach is very boring, and it is not as exciting as tripling your money in Tesla (TSLA) in less than a month. However, more investors who focus on long-term wealth accumulation potential of dividend growth stocks will be better off than investors who gamble on the next big growth stock.

An investor with a vision will look beyond the 3%- 4% current yields today, but look at the potential for higher distributions over time. An investor that starts small at a young age, builds a diversified portfolio of income producing securities with growing distributions when valuations are right, reinvests these rising distributions into more stock and continuously adds to his portfolio, will achieve wealth at a relatively young age."

Source:


http://seekingalpha.com/article/1530802-dividend-growth-investing-is-a-perfect-strategy-for-young-investors?source=email_investing_income&ifp=0

Portfolio - Jun 2013

Today is the first day I will start to document my dividend-income investments. Since the end of 2011 I have been constantly saving money, watching the stock markets, and trying to find the right income stocks that would allow me to preserve the value of my money.

While I slowly and very cautiously entered the booming stock markets, the Fed and ECB set their base rates to historical lows of 0.25% and 0.50% respectively. In this low-interest environment and with real estate prices currently exploding, I very soon came to the conclusion that there are currently no better asset classes available than stocks. 

At the same time, at current market highs, there is the risk that new investors buy into the market at already high price levels. Therefore timing is everything. That is why I still have a very high cash reserve at hand to invest in case of any price drops. 

My investment strategy is to invest in mostly mature markets, with a particular focus on Germany as my core and home market, the US, and Singapore. 

As passive income in Germany is taxed by 25% above a certain threshold, my after-tax yield is lower than that of other investors. It is harder to gain in wealth and benefit from compound interest. Still, I consider dividend investing as the best instrument for building up a capital stock and withstanding the low-interest environment. 

As can be seen in the table, I am aiming a >5% pre-tax return. In order to maintain this return, I complement investment grade stocks with some high-yield instruments. Expected dividends for 2014 are EUR 522 in total. That is not much, but as the Brits say: "Many a mickle makes a muckle". Assuming I invested all cash reserves, my current monthly dividend would be EUR 150 on average. That sounds better.

Yet, I think market prices are too high. So I am waiting for further price drops to invest. Lets see what effect Bernanke's statement will have on the markets in the coming days.