Investment Moats

Oh Shit! I started DCA investing at the top of the bear market!

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Investing using dollar cost averaging at the market top may not be that bad if you invest in the right investment and are discipline enough throughout.

In the past week, we written about the advantages of investing in low cost index funds or exchange traded funds (ETF) for people who do not want to take such a hands on approach with investing but want to make the virtues of early life compounding work for you.

In the Singapore context, many have highlighted Street Tracks STI ETF as the ETF that they use when they want to practice low cost index investing. STI ETF since 2002 inception have generated an annualized return of 9% with 38% of the returns originating from dividends. (Read report here)

Meeting up with an old friend

I managed to meet up with a friend of mine that I haven’t seen for some time. I best remember him for being a person unaffected in the most difficult times we faced.

We used to share some conservations on investing and the experience I remember best was his investment in Macdonald’s Corporation (MCD). MCD is the best dividend growth stock perhaps in the past 10 years. Great business model and it starts at a 3% yield but the crazy thing is that its dividend growth for 5 years have been 20%! That 3% basically doubled in 3.6 years.

My friend probably bought MCD at $70 (which at that time I thought it was expensive. ha! anchoring at work!) yielding 3%. The price now is $94.

Buying STI ETF near the all time high

So he lamented that he started investing in the STI ETF. To him it’s a no brainer way of making your money grow with the progress of Singapore.

The problem is that he invest in May 2007. Now when you hear that, your heart may jump out since that is at the very top of the Great Financial Crisis (GFC) that took nearly 60% off the STI index.

Dollar Cost Averaging the STI ETF using Lim and Tan Unit Share Market

Now I found out further that he didn’t just invest at the top of the market.

What he does is

  1. Set aside a sum of money per month
  2. Every month since May 2007 he put $1000 into buying odd lot shares of STI ETF
  3. Doesn’t like to wait for three months then invests

Now he uses Lim and Tan which gives him access to the unit share market.  For the readers asking me how to dollar cost average with a smaller sum this may be the way.

My take is that Lim and Tan charges you the same commissions like you trade the full lot, compare to Philip Securities which charges  $10.

Price Chart for STI ETF

(Click to see larger graph)

The price where he started investing was absolutely brutal. If I am correct that is the worst market plunge since 1997 Asian Financial Crisis.

Since then, the market didn’t return to the top of 3800.

The price summary shows where he got invested in. The common guess is that my friend suffered large losses even till this date. Even 2011’s high took it back only to 3300.

Total Returns of his Dollar Cost Averaging plan till date

I talked in the past of another friend who stopped his Dollar Cost Averaging plan when he anticipated the bear market. (See report here)

Good choice? That friend still believes in his astute market timing capabilities.

Lets look at this friend’s returns.

(Click to see larger image)

By adding $1000 every month, he put it a total of $50,000 to date. His return for 5 years is 9.24% with 85% of returns made up by dividends. Annualized the return is 1.7%.

His average cost have gone down to $2.80, which was much lower than the $3.10 he estimated.

Disciplined Approach to Investing

What impresses me about how my friend conducted this was that he is not DCA automatically, but every month he has to initiate that himself!

My friend did not let the early losses get into his head to stop him from abandoning his DCA plan.

And because of that it really saved his portfolio because he added a lot of units at $1.60-$1.80 prices which balance things up.

The majority of the returns had been from dividends, and without the dividends the returns would have been even more pathetic.

Share with us!

If you have been investing for some time but have not kept up to date with keeping track of your returns do contact Drizzt at [email protected] if you would like me to profile a stock or a portfolio this way.

To get started with dividend investing, start by bookmarking my Dividend Stock Tracker which shows the prevailing yields of blue chip dividend stocks, utilities, REITs updated nightly.

Make use of the free Stock Portfolio Tracker to track your dividend stock by transactions to show your total returns.

For my best articles on investing, growing money check out the resources section.

The secret behind stock splits

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For some stocks, when the price appreciates to a certain target price, the management may decide to split the existing share to smaller shares. This is to improve liquidity. Since going public in 1965, McDonald’s has paid twelve stock splits.

Similarly, when the share price is too low, the management may decide not consolidate the shares in a reverse stock split. SGX listed Aims Amp Industrial REIT recently did a 5 to 1 reverse stock split to consolidate its share so that it looks more appealing at $1 than at $0.20 to investors.

So what is the main benefit of stock split? from the underline words, you will be able to tell that the benefit is mainly psychology. The value of the shares you held doesn’t change, it is just the size of the number of shares.

It also greatly distorts a stock investors research when you think whether companies like McDonald and Singapore Press Holdings were good long term investments since their stock price look as if it has gone nowhere.

However, an investment of $2,250 in 100 shares of McDonalds at 1965, had grown to 74,360 shares worth over $5.7million as of year-end market close on December 31, 2010. So did SPH which split a few time, else it would have been a $16 to $20 stock.

A real life example was recently encountered over at Seeking Alpha where a retail investor shares what her parent actually did and how, if you hold a good stock, the stock splits are pretty amazing:

Greyledge Gal:

I’m 49 years old. For my 10th birthday In 1972, my father put $14,400 into XOM, purchasing 200 shares. I have never touched this investment nor have I plowed back the dividends into XOM or purchased any additional shares.

Due SOLELY to stock splits, 39 years later, that 200 shares has turned into 6,400 shares. I have no insider knowledge but XOM hasn’t split for over 10 years and it is probably ripe to do so. Normally, splits have happened when the stock is selling from $70-$80/sh.

Who knows what the future holds and your investment might turn out quite differently than mine has; however, I don’t see the world quitting on oil anytime soon and XOM is also positioned well in shale and natural gas. I doubt you could go wrong even with the lower yield IF and ONLY IF you are going to make this a long term, lifetime, investment. Yes, it takes a lot of intestinal fortitude (like when IBM went to heck about 20 years ago, it took a lot not to sell but boy am I glad I didn’t!), but if you have the stomach for the roller coaster ride, investing in blue chip stocks like XOM, IBM, Chevron — another winner, MCD, etc., is the safest route for building retirement savings.

I run a free Singapore Dividend Stock Tracker . It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

Macdonalds $MCD correcting. Dividend Income Investors should take note.

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Macdonalds have been a favorite dividend stock of many investors because of its strong business model, reasonable prevailing yield and its dividend sustainability.

  1. MCD is a member of the S&P 500 Dividend Aristocrat
  2. MCD since 1976 have increase its dividends for 34 years
  3. No negative free cashflow
  4. Dividend payout is less than 60% of earnings
  5. Dividend growth is increasing
  6. Current Dividend yield at this juncture is 3.29%. International dividend investors should take note that factor in 30% withholding dividend is 2.3%

Interested investors should wait for a change in price movement to add on exposure. But of concern is the high volume sell down. Good readers could update me if there are any big negative news.

I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.

How to calculate dividend withholding taxes on US ADRs for international investors: My experience with Telefonica

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Not too long ago I wrote about being invested in Telefonica as an experiment to see how much I will be tax as a international investor investing in US ADRs and how much taxes I will be levied with.

To recap:

  1. There is a 30% withholding tax on dividends of US Stocks listed on US Stock Exchanges. Last I checked, there is not many ways you can bypass this.
  2. The withholding tax currently for Spain, where Telefonica is from is 19% as of this posting (Dec ‘10).This was raised from 15% in Jan 2010 if I am correct.
  3. We do not want a situation where our dividends are first taxed 19% at Spain and then 30% more in US before giving to us.

I invested 50 shares in Telefonica at a price of USD $61.23.

No of Shares: 50

Purchase price (USD): $61.23

Exchange rate then : 1:1.40 (Yes its terrible)

Total Cost (USD): $3061.00

Total Cost (SGD): $4285.00

Latest Half Yearly Dividend Declared (USD): $2.700750

Total Dividend (USD): 2.700750 x 50 = $135.0375

Total Dividend Received in DBS Vickers Account (USD): $108.38

Exchange rate now: 1:1.32

Total Dividend Received in DBS Vickers Account(SGD): $143

Total Withholding Tax Levied: 1-(108.38/135.0375) =  19.7%

Yield on Cost Based on US Cost before withholding tax: 2.70075/61.23 = 4.4%

Yield on Cost Based on US Cost: 108.38/3061.00 = 3.52%

Yield on Cost Based on SGD Cost: 143/4285 = 3.33%

So what can we drawn from this?

1. The only withholding tax you have to content with is the Spanish Government’s withholding tax of 19%

The dividend declared of USD 2.700750 that you see in google finance is before taxes. For US investors they need to deduct this 19%. For international investors like me in Singapore you need to deduct this 19% as well.

2. When investing in ADRs, different countries withholding tax matters in buying decision

What this means is that if you invest in a stock in Holland or in Brazil you are subjected to that government’s withholding tax rate.

It can be quite a hassle. Is it worth it?

3. Yield on Cost gets severely affected by withholding taxes

The yield on an annual basis was 8.8% for a stable growth stock. This gets cut to 7.04%. For Telefonica, 7% looks to be still respectable, but in theory the bigger your dividend yield the bigger your heartache.

For 20% withholding tax rate:

  • 12% becomes 9.6%
  • 8% becomes 6.4%
  • 4% becomes 3.2%
  • 2% becomes 1.6%

For 30% withholding tax rate:

  • 12% becomes 8.4%
  • 8% becomes 5.6%
  • 4% becomes 2.8%
  • 2% becomes 1.4%

4. Look for dividend stocks that grow increasing payouts

So if you are looking for dividends from US stocks and ADRs, my advice is that don’t make that your primarily target.

The opportunity cost of buying a US Dividend Stock is a Singapore one and at Investment Moats, on my Dividend Stock Tracker, the average yield is from 3.5% to 9% at the moment.[Check it out here >]

So why go international or US centric? One reason. For the past 10 years, you cannot find one Singapore stocks with good fundamentals that can increase its payout consistently.

They either end up at the same point or their payout goes up and down.

Around the world, we can find stocks with

  1. great fundamentals
  2. wide economic moats
  3. raise dividends for 20-50 years

Your yield can start from 2% but at a different growth rate your eventual yield on cost could be 15% by the time you require.

At the end of the day, we do not invest in dividend companies, we invest in business that

  1. grows against inflation
  2. generates solid cashflows
  3. innovative and proven track record (Macdonalds, INTEL, Abbott, Pepsi)
  4. up and coming dividend growers (Cisco, Total SA)
  5. at good valuation vs cashflow generation potential

For more into this check out the dividend aristocrats,dividend achievers and dividend champions here.

I run a free Singapore Dividend Stock Tracker available for everyone’s perusal. It  contains Singapore’s top dividend stocks both blue chip and high yield stock that are great for high yield investing. Do follow my Dividend Stock Tracker which is updated nightly  here.