Over the weekend, I was invited to speak at Invest Fair 2023.
I spoke about one thing many investors don’t pay much attention to… how to build a dividend portfolio.
(Managed to get a photo with Shanison Lin, CEO and founder of InvestingNote)
I mean, growing dividends isn’t just looking at yield.
Over my 13 years investing, what I‘ve noticed is investors tend to have their own rules of buying (many get from their friends, families and brokers).
Some common rules include…
“I only buy Singapore banks”
“Just stick to government-linked companies…”
“I only want 5% yield…”
These rules tend to focus on a particular stock, sector or country. And that’s a big mistake. Why? Different businesses, or different sectors behave differently at certain periods.
Some stocks you buy today can outperform the rest in one period.
Some stocks may underperform the next.
Now, there’s nothing wrong with buying say, Singapore stocks. But take a look at different markets over the last five years. There’s missed opportunities if we’d only invested in one stock, sector or country.
For instance, in 2011, the best time to buy is US and Singapore banks.
Later on… in 2015, Singapore REITs were a good bargain.
On the other hand, I’d avoid high-growth tech stocks in 2020 to 2021.
Then earlier this year, we started looking at US blue-chips. Different sectors behave differently.
When we go global, we get access to tens of thousands of stocks and finding some of the best businesses. In fact, investors today are different compared to 50 years ago.
Last time, there wasn’t the internet, and you could only rely on your brokers to give you information. Commission rates were very high and you could only access your local stock exchange.
Today, with the internet, commissions are highly competitive, you’ve access to an abundance of information and to different markets… so why not take advantage of it?
Why diversify your Singapore dividend portfolio?
Many superinvestors, including Peter Lynch took diversification seriously. Peter Lynch ran the Magellan Fund for over 13 years and he grew it from $18 million to over $14 billion. During these 13 years, he made close to 30% annual returns a year.
This was despite all the crises he has faced in 1980, 1987 and 1989. He owns more than 1,000 stocks. He was convinced of diversification and has more than 1,000 stocks in the fund.
Even Warren Buffett who concentrates his portfolio in public stocks also diversifies across his private businesses.
Here’s the thing. According to research…
Buying 25 stocks already reduces your risk by as much as 80%.
Buying 100 stocks reduces your risk by as much as 90%.
Buying 400 stocks reduces your risk by more than 95%.
As the number increases, the benefit of diversification drops.
This means, you actually only need to have 25 stocks to already reduce most of your risk. And should give you a reasonable enough balance. This way, you don’t have to be right 100% of the time. John Templeton says he’s right only about 60% of the time and has one of the best track records in the investment business.
There are also three simple rules you can follow when it comes to building a global dividend portfolio.
You can also check out my guide on How to Safely Build a Long-Lasting Dividend Portfolio.
1. Avoid leverage
When you invest your portfolio, you’re buying a part-ownership of a business. You don’t just own all the assets in cash, equipment and intellectual properties. You also take up the debt of these companies. If you invest in businesses full of borrowings, your portfolio becomes leveraged.
The higher the leverage the more risky your portfolio.
This doesn’t apply to banks and REITs.
For example, how did China’s biggest property developer, Evergrande, defaulted? Well, it simply overleveraged itself.
In 2021, it had more than CNY570 billion of debt, and equity of CNY411 billion, which means it has a total debt/total equity of more than 100%.
2. You don’t want to have more than 25% in any sector
As I’ve shared, a good basket of 25 stocks should help reduce most of your portfolio risks. But buying 25 stocks in REITs or tech stocks isn’t diversification.
Because stocks in one sector may share the same characteristics, and are often sensitive to a single factor.
For example, buying oil & gas stocks will be affected by oil prices. In another case, the S&P 500 crashed in a certain period because it held too many stocks in one particular sector (see below).
Put it this way, that was what happened to the S&P 500 when technology and telecom stocks accounted for more than 40% of the index. During the global financial crisis, it was financial stocks that accounted for 22%.
3. Buy large-cap companies with safe dividends
When you build a global dividend portfolio, the key is regular income. This means, you don’t want to face dividend cut. That comes when companies have too much debt, cyclical profits and inconsistent free cash flow.
I shared China Mobile (also one of my ideas in Diligence membership) is they have a low leverage, recurring revenues and profits and a conservative payout ratio.
Unlike Singapore REITs that pay 90% of profits as dividends, China Mobile only needs to pay 60-70% of profits as dividends to achieve a far higher yield.
My final thoughts — global dividend portfolio for Singapore investors
The quiet force behind building a global dividend portfolio is diversification. Building it is about diversifying not just 25 stocks but also looking at making sure companies you own don’t have excessive leverage (best is avoid leverage), spread your eggs across the right baskets and not overly concentrate.
Lastly, target large companies with safe dividends. And that means with a sustainable dividend payout ratio. When you diversify across different baskets of stocks and sectors, you’re protected against the dangers of losing money over the long term and able to better collect your regular stream of dividend income.
What do you think?
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan