INV101 Why must we reinvest the dividends?

When we invest our savings by buying company shares, we are looking for two types of companies. The first is one that will give us good dividend yield and rate, and the second is one that is in the growth stage. I will only touch on the former, as the second type is more complicated and riskier.

Let us go back on why we want to invest our savings instead of the leaving them in fixed deposits or savings account. Like I said in previous post, when we have decided to buy company shares, we are looking at double digit growth in our savings. Here's how.

1. Look for a company that gives consistently high dividend rates, at least 6%.
2. Buy the company's shares, at least $10,000 worth.
3. Upon receiving dividends, buy more of the company's shares.

I will just use Cerebos as an example here.
Janice bought 10,000 Cerebos shares at $1.20 per share. She had invested $12,000 in December 2002.
She received dividend of $0.129 x 10,000 = $1,290 in March 2003. Then she bought an additional 1,000 shares at $1.26 per share and own 11,000 shares. She continued to do this until now.

For the past 9 years, her initial investment of $12,000 has reached $119,500. Her initial investment has grown at a rate of 29.1% per year, compounded for the past 9 years. This is illustrated in the table below.

Year	Number of shares	Dividend	Buy number of shares	Price	Remaining Cash	Value
2003	10,000	$1,290	1000	$1.26		$13,890
2004	11,000	$1,760	1000	$1.70		$20,460
2005	12,000	$3,000	1000	$2.00	$1,000	$27,000
2006	13,000	$3,500	2000	$2.20		$32,100
2007	15,000	$3,750	1000	$2.40	$1,350	$39,750
2008	16,000	$4,000	2000	$2.68		$46,880
2009	18,000	$4,500	2000	$2.24		$44,820
2010	20,000	$5,000	1000	$3.50	$1,500	$76,500
2011	21,000	$6,720		$5.30	$8,200	$119,500
					Rate of Growth	29.1%

If she were to hold on to the dividends instead of reinvesting, her initial $12,000 has grown to only $74,278. That is only a rate of 22.5% per year compounded for the past 9 years.

Year	Number of shares	Dividend	Buy number of shares	Price	Remaining Cash	Value
2003	10,000	$1,290	0	$1.26	$1,290	$13,890
2004	10,000	$1,600	0	$1.70	$2,890	$19,890
2005	10,000	$2,500	0	$2.00	$5,390	$25,390
2006	10,000	$2,688	0	$2.20	$8,078	$30,078
2007	10,000	$2,500	0	$2.40	$10,578	$34,578
2008	10,000	$2,500	0	$2.68	$13,078	$39,878
2009	10,000	$2,500	0	$2.24	$15,578	$37,978
2010	10,000	$2,500	0	$3.50	$18,078	$53,078
2011	10,000	$3,200		$5.30	$21,278	$74,278
					Rate of Growth	22.5%

You can see from the two tables above that a 6.6% difference is actually $45,000 difference in 9 years. A 29.1% per year compound interest is much more than the 5% to 9% that your fund manager can promise you. It is always good to spend some time to do research on the companies that you are interested to invest in and rake in the good returns that nobody can promise you. 

Why let the fund managers take a cut from your earnings when you can earn 20% more yourself?

Happy investing and cheers.

Disclaimer: This post serves as a reference for potential investors. All investments involve risks. Readers are advised to exercise their own discretion when investing.

INV101 Investing in the stock market

The highest rate of return on savings is to manage the investment on your own. It's no doubt that some people find it tiring and troublesome to do the research and to keep up with the share prices everyday. As investors, we do our own research on the companies that are of interest to us. However, we do no keep up with the share prices everyday. That is what speculators do.

There are many ways to grow our savings.
1. Leave the money in the savings account.
2. Leave the money in fixed deposit account.
3. Leave the money with fund managers.
4. Leave the money in our own hands.

The interest rate of the first two options are way below our intended rate of return. Both choices give only up to 1% per annum interest. This is far from beating the inflation in Singapore (currently at 4.5%). Leaving your money with the fund managers can only beat the inflation by a small percentage margin. Even if the fund managers are able to give you a returns of 7%, it beats the inflation by 2% only. On top of this, the fund managers actually earn part of your returns as management fee.

To maximise the growth, investors should manage their own money. Looking for companies that give returns of 10% and above is not impossible. I have a few companies that has given me more than 10% returns compounded for the past few years. The dividends received were reinvested to buy more shares of the wonderful companies. In this way, then were we able to grow our savings at double digit rates.

Take some time off to think about it. Do you want your savings to grow at least 10% per year compounded for the next 20 years or do you just want to grow your savings at the same rate as inflation? The choice is yours.

Cheers and happy investing.

Reply from the unprofessional agent

Finally, after 10 long days, I received a reply from Savills' executive director for residential sales. She has attached the agent's reply to her, and would like us to take a look. This is the whole picture. Ms Jodia, a colleague of Mr Thomas Lee, is the exclusive agent for selling the unit. Hence, on 2 July, Mr Thomas Lee was just there to help her as she was not free to be there. So this is Jodia's reply.

1. The owner strictly allows only 1 weekday and 1 weekend viewing. We have seen the unit on 2 July (Saturday) hence we cannot view on 3 July (Sunday). It's fine with us. Hence, we arranged to view on 9 July, which they agreed upon.

2. The agents decided to present a final offer to the owner on Wednesday 6 July, while we looking forward to view on Saturday. We were not informed of their intention to present their offer to the owner. She claimed that they need to work in the best interests of the seller, to close the deal in case they missed the buyer who make the offer." I feel that is not for the best interests of the seller, but to the best interests of themselves.

Now here are my doubts.

1. The asking price in Property Guru was $1.45 million. When we went to view the unit, Mr Thomas Lee said $1.5 million. Why is there such a huge difference?

2. Did the owner know that there are other interested buyers, like myself, that has shown interest and can make a higher offer?

3. Why didn't the agents call to ask if we can have any higher offer, before closing the deal hastily? I think the owner will not reject any offer up to $100,000 above his asking price.

Anyway, we cannot do anything here as the option to purchase has been issued. On our part, we can only continue to look for another house. This is the problem with having unprofessional housing agents.

Do you have the same experience? Share it here.

A lesson learnt from recent incident...

I went to see a 4 bedroom, 1722 sqft top floor unit at Hillview area on 2 July 2011. My wife and myself like the place very much, so we intend to bring her parents along to take a look. We had wanted to view again on the very next day, which is a Sunday. The agent, Mr Thomas Lee from Savills, said that only 1 weekend viewing is allowed. Therefore, we arranged for a second viewing on Saturday 9 July 2011, which he said "OK".

Out of the sudden, one Thursday evening (7 July 2011), the agent just called my agent to say that the deal is closed. That is, he has issued the Option to Purchase form as one buyer has match the seller's asking price. As a seller's agent, knowing that there are more than one interested party, shouldn't he ask if we can offer a higher price?

I felt like I was robbed of a chance to even offer at a higher price than the owner's asking price.

How do you find the agent, Mr Thomas Lee, of his professionalism here?

Forget about Singapore property for now?

The rising prices of Singapore properties has casued people to panic BUY without considering the consequences. When the interest rates go up, people who have taken a loan from the bank will feel the pinch. A $1million loan currently needs only about $2,800 monthly repayment. This is due to the interest rate of close to 1% per year. What if the interest rate goes up to 2% in the next 2 years? The monthly repayment can go as high as $4,000 with the same amount of loan. If the interest rate goes up to 3%, I don't know how the investors are going to cope with the repayment. Where are the current property investors going to get the money to pay for the housing loan? They will have no choice but to sell their property.

So do we just forget about investing in Singapore property for now?

No, we don't. Instead, we will keep looking around for undervalued properties. There are bound to have some properties that have good value and selling below valuation price. At the same time, keep ourselves informed of the property trend through the URA website and news while we wait for the property prices to fall.

It is not going to be easy to look for such properties at this time. There will be weeks that you will not be able to find a single unit to view. But it's ok. We are not rushng to own one anyway.

Cheers and Happy Investing.

Popular Holdings and its dividends

Popular Holdings announced their full year results on Friday, after trading hours. Its share price closed at $0.16.

Headlines from the business times:"Popular's Q4 net earnings down 74% at $2.2m"
Headlines from the straits times:"Popular's net profit falls to $23.8 million"

What is your feeling when you read the two headlines above? Please comment.

Let us do a bit of calculation here. This is my personal analysis. It does not represent anybody, not even the company.

Only after reading the news in straits times, I found one very important sentence: "The group sold another five units last month." I have been to the actual unit and  each unite were selling at the minimum price of $3+ million. Therefore, the first quarter results should be good news.

After reading the headlines in the business times, I believe novice investors will definitely panic and sell their shares soon. I will definitely stockpile more if the price goes lower.

If you have read further, earnings per share fell to 2.83 cents from 4.53 cents a year ago. This is definitely misleading. The total shares in FY2011 is about 841 million shares while there are only about 691 million shares in FY2010. It looked like the earnings per share has dropped by 37.5% but in actual fact, the earnings has only dropped 23.9% when we look at the profit after tax.

Assuming that you are holding 1 million shares. Your shares actually profited $28,300. If you have bought popular shares at $0.15 per share during recession, then your percentage profit is actually 18.8%. In total the group is giving out 1 cent of dividend per share, in which you will receive $10,000 for FY2011. That is a good 6.7% dividend yield from your investment.

If you have been more diligent, you will see that Popular has been profiting 9 out of 10 years and each year the dividend is really high. You can click on the link that I have provided on the right hand side of this blog, to see the summary that I have compiled.

One more thing to look at. Although profit has dropped but the net asset value is increased by another 5.7% from 21.45 cents to 22.68 cents. Friday's closing price of 16 cents is actually a discount of 29.5%.

This post is only my personal view on the stock. Whether it's a good stock to own, it still depends on your own judgement.

Cheers and happy investing.

Disclosure: I own Popular Holdings shares at time of post.

The one rule that many property investors may overlook

Monetary Authority of Singapore (MAS) proposes to the bank for a standard fact sheet for home loans. This includes how lenders will be affected when interest rates rise. There is one more the item that property buyers overlooked. What actually happens when the value of a home decline? A lender is supposed to top up the difference between the outstanding bank loan and the latest valuation of the house.

Here's an example.
An investor bought a house at $1 million. For the next few years, if the property value remains or goes up, both the banks and investors will be happy. What if the property value drops?

This investor took an 80% loan with a bank ($800,000). After a few years, a major crisis like the one in 2008/2009 surfaces (we never know when it will happen). The value of the house is not about $700,000 as there are more supplies and less demands. The investor's outstanding loan with the bank is $780,000. The investor is expected to pay the difference of $80,000 to the bank.

This payment is easily overlooked as people always think that property prices will just keep going up and will not come down.

1. Before buying any property, we must make sure that we have sufficient funds before making the commitment to buy.
2. Always buy properties at a discount of your valuation. This will protect you from having to pay the difference when there is a decline in the property value.
3. The best time to buy a property is during the 'perfect storm'. That is,
    a. when interest rates go up.
    b. when there is another crisis.
    c. when supply is more than demand.

Have fun investing.

Cheers.

Enterprising Investor vs Defensive Investor

I was talking to my brother this morning regarding property investment. I realised that both of us are two different types of investors. I remembered reading Benjamin Graham's "The Intelligent Investor". In it, he mentioned the two types of investors, the defensive investor and the enterprising investor.

I am an Enterprising investor while he is a Defensive investor. How did I find out?

My brother bought his current 3-bedroom with PES unit at less than $700,000 five years ago. At current market price, he can sell it for $1.2 million. There is a development, going to TOP soon near his area. A seller was asking $1.2 million for a mid-high floor 4-bedroom unit. Therefore, I suggested that he sells his current one to upgrade to the 4-bedroom unit and at the same time cash out the profit. His only reply was, "Live within your means. I would have to take up more loan if I were to buy now." He was contented with his current lifestyle. He will only start investing when he has saved enough for a second property. This is an example of a defensive investor.

What will you do if you were him? To sell and change to the 4-bedroom unit or to stay put in the current one and save enough to buy a second property?

Here's another example of a defensive investor. A ex-colleague of mine bought a new condo to move in and will be renting out her HDB flat. Her family has been staying in the HDB flat for more than 15 years. She bought the condo after she made sure that she has enough to service this current home as she has already fully paid her HDB flat.

As for me, I am an enterprising investor. I have downgraded twice, first from an EC to HDB 4 room resale flat, bought an investment condo and rented it out during the financial crisis, sold it off a year later, after the recession is over. I bought a terrace house with the intention to stay, but the profit made is too tempting to hold on to it. So this is the second time. I downgraded from a terrace to a condo. In the process, I have cashed out a handsome amount of profit and of course my outstanding loan is a few times higher than my brother's. His current outstanding loan may be at around $200,000 while mine is about $1 million.

So what kind of an investor are you? Have a word or two in the comments please.

Cheers.

Is asset enhancement really useful?

Asset enhancement happens when the value of your asset increases in value. However, it is not considered an enhancement unless you cash out the value of your property.

Here's an example. An old couple bought a 4 room HDB flat (98 sqm) in town area for $27,000 in 1980, when they were 40 years old. They have been staying there till now. The value of the flat is now at about $420,000. The value of the property has increased over 31 years. The couple is now in their 70s.

If they continue to stay in the flat, they will not enjoy the cash that is locked in the property.

If they are to sell it at $420,000, there a a few points to take note.
1. They are already in their 70s, no bank will want to approve their loan application.
2. Their combined CPF account will have only about $30,000. This is because they have spent every single cent in the CPF ordinary account on this flat, they were from a low income family.
3. They cannot buy a brand new flat from HDB within 30 months.
4. They have to pay levy to HDB if they downgrade to a smaller flat, which must be bought from the resale market (more expensive).

Hence, if they are to sell their HDB flat now, a same 4 room resale flat costs about the same price, and without ample CPF monies in the ordinary account, they still have to come up with cash to buy the house, as no bank will want to give them a loan, due to their ages. Therefore, in the end, they are left with little or no moeny at all.

Where is the asset enhancement in this case?

How much should a new 4-room HDB flat be selling at now?

If you have read my book, I have mentioned that the selling price of a new 4-room HDB flat was sold at $27,000 thirty years ago. If we were to use the inflation rate of 5% per annum for the past 30 years, a new 4-room HDB should be priced at around $116,700.

Recently, when I was having a casual conversation with a taxi driver regarding the overpriced new HDB flats. He shared that a main contractor (his passenger) confirmed that the cost of building a HDB unit is close to $100,000. Adding in the administrative costs to sell the flat, I feel that my calculation of the above selling price is reasonable.

HDB should relook at their mission. Their mission is to provide affordable housing for young and old Singaporeans. Why is a 4-room HDB flat selling close to $250,000? That is double the price it should be selling at. How many young couples can really afford this kind of price?

A suggestion is to stop building new flats in the mature estate. If the couple wants to stay close to their parents, either buy from the resale market (pay a higher price) or their parents sell their current place and the two families buy two new flats (at a lower price) in the new estates like seng kang or punggol. The parents need not wait for 30 months to buy the new flats. This is just a suggestion. It is still up to HDB to change their policies.

Feel free to comment on this post.

Cheers.