Tuesday, 30 June 2015

Portfolio Update - June 2015

*As of 30 June 2015

No. of Shares
Average Price (SGD)
Total Capital Invested (SGD)
Cache Logistics Trust
Keppel DC REIT
Cash Reserves and Equivalents

Total SGD

Total Invested Capital = $36,635.20

Total Expected Dividends/month = $218.59

Average Dividend Yield = 7.16%

For the month of June, I have bought up a fair bit of REITs to my portfolio. This includes the usual Cache Logistics Trust and a small addition of Keppel DC REIT.

The purchase of Cache Logistics Trust is a usual REIT which I have traded regularly over the past few quarters, with the exception of certain quarters where I felt the prices were too overvalued and ran the risk of a heavy profit taking. Other than that, prices which were fair and below was generally welcomed and I am happy to accumulate for a good risk to reward ratio. If my trading plan fails, I intend to hold the stock for its good yield of 7+% to cover for my risks taken. 

But why this stock but not others?

Well, it has to do with the charts. Cache Logistics Trust presents a good trading opportunity to buy on supports and sell on resistances. It produces clear support and resistance lines, which is pretty easy to spot even for a novice. The plus point of trading a REIT is that compared to trading other stocks which give little or no dividend, REITs provide high dividend yields which allows some protection if the trade goes bad, which should be acceptable because I had entered at a position where the price was either fair or undervalued in my opinion. So far I had been fairly successful, but I have been generally trading only in small quantities as it is still currently in a "testing" phase. This time I have increased to a fair bit of position, partly because of the breaking of supports at 1.15/1.145 which I had initiated the first and second positions, and towards the lower support at 1.13/1.135 where I averaged for my third position. Now, basically its a more of a hope and pray situation haha

For Keppel DC REIT, its more of an investment than a trading position, though if the price becomes attractive, I will not rule out selling my position. Keppel DC REIT is a defensive stock with its long WALE of 9.2 years. It has a healthy 8.1 interest coverage ratio and a low average interest rate of about 2%. This numbers are important particularly with the impending interest rate hike by the US Federal Reserve. I would like to see high coverage ratio, which shows how many times of earnings covering its interest expenses from taking on debt and low average interest rate to minimise interest costs. Gearing is a low 29.9% which allows for ample growth of DPU through acquisitions, which recently it has made its maiden acquisition of a data centre in Sydney which is likely to provide some boost to the DPU. The current yield is a decent 6%, but I am hoping for more acquisitions to provide a greater boost to its distributions, taking advantage of its low gearing. 

Let's see how this 2 investments go from here.

Saturday, 27 June 2015

The Current Slump in the Oil & Gas Industry

When I joined my current oil company back just last year in August 2014, oil prices was trading slightly above $100 per barrel.* The oil and gas sector in Singapore back then was running at full steam, coming from a strong year in 2014 for the "black gold" related businesses. Analysts were expecting 2015 to be no different, some even predicting this year to be stronger for the oil sector.

*Refers to brent crude oil prices

What actually happened was a rude awakening to everyone's expectations. Oil prices plunged to less than half of its value back in mid 2014, to a low of $45 per barrel in early 2015. It has since recovered somewhat, stabilising at around the $60 per barrel region, leading to some analysts to believe that we have seen the worst in oil prices, and that the bottom has passed. Well, oil prices is one thing, but the current situation in the oil industry remains as bleak as when the oil prices plunged back then. I can say this for sure because I am working in the industry, and being at the frontline in this industry has allowed my to form my own views about the future of this industry against the more optimistic analysts.

Oil companies are still cutting back aggressively on costs and spending, particularly capex, short for capital expenditure on new investments in oil assets. The focus right now is on keeping and maintaining the existing assets for a long as they can function. This would affect many companies like Singapore-listed Keppel Corp and Sembcorp Marine, largely because this companies require new orders to maintain their income streams. They do not own oil assets or drill for oil, they service the oil majors with assets like rigs and ships. Primarily, we can view them as manufacturers of such assets, and this is currently a potentially a weakness because they rely on the spending by oil majors to acquire new rigs or ships. With them cutting back on spending aggressively, it doesn't take a genius to know what would happen next. The current supply glut of rigs are not helping, as well as intensified competition from smaller rig builders in Korea and China.

How about if when oil prices do recover strongly back to the $100 per barrel level? First of all, I want to point out that this may take a long time to happen, because the current low oil price situation is a supply-side driven phenomenon, unlike the previous crises of 2008-09 global financial crisis (GFC), or the 1998 asian financial crisis (AFC). Those crises were demand-side driven price plunges because of the plunging demand from consumers. The current situation is different because the issue comes from the heavily increased production of oil, not just from the US shale production which OPEC blames, but OPEC themselves not willing to cut back on production, preferring to produce more to protect their market share. This lead to price plunges not seen since the 1980s. 

Perhaps lets rewind ourselves back to what happened in the oil glut of the 1980s.

If we look at the chart above, oil prices plunged in 1985-86 due to a global glut in oil supplies partially due to slowed industrial activities in major countries. Because of the previously high oil prices in early 1980s ($30 per barrel then was $100 per barrel today), there was over production of oil from non-OPEC countries. The supply glut had actually happened in the early 1980s, with the Soviet Union becoming the largest producer of oil and the US relaxing its controls over its own oil production. This surge in production caused prices to slip, and OPEC responded by cutting production to maintain high prices. This did not work as the reduced production was simply taken over by non-OPEC and OPEC countries who cheated the Saudis. The Saudis were not a very happy group when they found out some of its OPEC members were cheating, so they punished them by producing at full capacity. Oil prices plunged when that happened to as low as $7 per barrel.

US Marines walk past a burning oil well in Kuwait
In terms of price recovery, it did happen, though temporarily during the Gulf War in the 1990s. A sharp spike in the chart temporarily jacked up the price of oil back to the pre-1980s glut era, but fell back down just as quickly when the war ended. Sustained price recovery only came a good 15 years after the plunge in prices.

So if you think this is going to be a simple V-shaped recovery for oil prices, think again. Though I believe that prices would most likely recover earlier than 15 years it took back in 1980s, because the still strong demand from India and China will likely absorb the higher supplies of oil. Once the oil industry finds its footing, and when the market realises that the demand is still very much intact and even growing, prices should recover, likely in a slow sustained manner. The lack of capex spending on new assets also would result in less oil producing assets, which in turn result in demand outstripping supply in future. This is what is going to happen eventually, but the question we should be asking is when, not what will happen.

So, what I am trying to say is that oil demand is here to stay, and while the oil glut may cause reduced prices, going long term on fundamentally strong oil companies is a sound strategy. Keppel Corp or Sembcorp Marine? Well the choice is yours to make, but I have an advice to those who are interested. Both are oil service companies, so basically they will feel the pain much earlier due to rapid capex cuts, and will only enjoy the benefits of the recovery much later than when prices recover when oil majors realise that the industry has recovered before kick starting the capex spending again. In addition, we buy shares as low as possible, so what we do not know is whether the market has priced Keppel Corp and Sembcorp at weakened earnings, as we have yet to see earnings weaken. The large order book created in the pre-glut years is keeping them busy with income streams in the meantime. 

So if you would ask me, I would prefer to wait it out first because the prices may face more downside if cancellations or postponements of the orders are made. Besides, I am already accumulating my own company's shares as part of the employee stock plan, so that should be enough of an exposure to the oil industry for now.

What do you guys think?

Monday, 22 June 2015

How much do you need to earn to be average in Singapore?

Well, we all might wonder, if we took all the recorded salaries of everyone in Singapore and took an average, what would it be? Of course, people in Singapore are "kiasu", which basically means hating to lose out to others, so would very much like to know this in order to know where they stand.

Hate to disappoint, but the average salary would be $5,493. If you are like me, you will most likely be really disappointed with your current salary. But emotions aside, lets see how this is calculated. We arrived at $5,493 from taking all the recorded incomes, basically GDP, and then dividing by the total number of the country's population.

Some of you might say, oh wait, how about the unemployed, the retirees, the school-going children and students? Now, we know where is this heading, taking more people out of the equation is going to make the average income even higher!
Well, the Comprehensive Labour Force Survey done by the Ministry of Manpower proves this by stating the average income to be... wait for it...... $9,207!!!

Oh crap, you might say. This is really way beyond us. In fact, Many people would not even be able to work till they get a salary of $10k or beyond. Actually, that is true, because the average income is skewed so high because the rich are really really rich and the poor are really really poor. The gap between the poor to the middle class is say 5cm, and the gap from the middle working class to the rich is really like 100cm. This is just an analogy to show how skewed this is, which propels the average wage to a whooping $9,207.

The median income is a better indicator. It shows the income earned by the majority of the population. And it is actually just $3,770. Phew!!! We can all breathe a sigh of relief, now that is more realistic some might say.

What we should take from this is actually much more important than simply benchmarking ourselves. We should note that the incomes declared include not just the monthly wages but other forms of incomes as well. So what does this mean?

Don't just stop at working hard to boost your wages. Complaining how low your wages isn't going to make things any better. Instead, look for other forms of income, particularly passive forms of income. The rich got really rich because of the very powerful boost from passive incomes, combined with the power of compounding as I have shown in a previous post. So really, we should stop procrastinating and start working towards our financial freedom today!

Sunday, 14 June 2015

Index Funds, a great way to begin your investment journey

Many of my friends new to the scene of investing often ask what they should invest in, something that would have lower risk and a higher return than say, bonds or current inflation rates. Without hesitation, I would recommend index funds. Why, we might ask?

Well, we know statistics had proven that most fund managers of active funds failed to beat the index returns over a certain period. Managers of active funds as the name suggest, actively manages the fund portfolio by selecting stocks which he thinks will beat the market. Often, such funds have higher fees that passive funds which usually track the general market. Definitely then, we can say why not we invest in fund managers which had beaten the market? One thing is that, history may prove a useful tool to gauge a manager’s performance, but the future performance might not be similar in many ways. This could be due to the manager’s lucky streak of being in the right industry at the right time, and this may or may not be due to the well-timed anticipation of the manager.

So, we are pretty well off investing in funds which track the index itself (passive funds), producing market returns which would be enough to beat inflation eroding our wealth. So where do we start?

Well, in Singapore, we have the popular Straits Times Index (STI) ETFs. ETFs are exchange-traded funds. They track all kinds of popular assets; gold, oil, forex and indices etc. For Singapore index funds, there are the SPDR STI ETF and the Nikko AM STI ETF. They are both listed in the Singapore Exchange (SGX) are can be traded like stocks. Both ETFs are good in their own ways, but I would prefer SPDR STI ETFs now that the SGX have already reducing the minimum board lots since Jan 19. The initial advantage Nikko AM STI ETF had over the SPDR STI ETF was that Nikko could trade in lower board sizes of 100 shares, but since the board lots have been reduced across the board, it is now a much clearer choice. In addition, the SPDR STI ETF has a lower expense ratio, which measures the amount of fees the manager charges for managing the fund, aka adjusting the portfolio in order to track the market index as close as possible.

The minimum commission to trade STI ETFs apply though, which is usually $25 for most brokerages. This could be very hefty for small investors looking to only invest say a few hundred bucks into the ETF every month. In which case they can look to many products in the market which allows regular investments into ETFs, such as the POSB Invest-Saver, the OCBC BCIP and POEMS Share-Builder. For more in depth details on these plans, you could refer to the below link.

However, the average total cost will be much higher than buying directly from SGX, but it would be very useful for retail investors looking to invest only a few hundred dollars regularly every month. For new investors, this would be a good way since it allows dollar-cost averaging, which eliminates the risks due to market timing.

But there could be an even better way to do dollar-cost averaging, contributing regularly while enjoying the lower costs of buying directly from SGX. Let me present you...

Yes, the no minimum commission works wonders here for the regular small time investor, and could prove to be a very useful tool, provided one has the discipline to continue to buy the ETF regularly, irrespective of the market sentiments at the time. I know there are many people out there who can be easily spooked by market events which deviates them from regularly contributing to the fund.

So which will you choose? The choice is up to you...

Sunday, 7 June 2015

Dividend Simpleton, a trader or investor?

Yes, I get the question posed to me by some of my fellow friends when I shared some of my strategies in buying stocks. So is Dividend Simpleton an investor or a trader? Well, it depends on what is your definition of a trader or investor. I would like to perceive myself as a hybrid of both, one who is willing to embrace the different sides as an when the situation calls for it. Oh my, Dividend Simpleton has a spilt personality! Well, it isn't so bad, it simply allows me more flexibility on my part, which really helps in being nimble in volatile markets.

As the name suggests, Dividend Simpleton looks for stocks which pays out a reasonable dividend yield and purchases them when their valuations are perceived to be of fair value. I would like to take this opportunity to point out that what is perceived to be fair by one would be completely different by others, and we assume the risks of our own actions.

My intentions to purchase some shares initially may have changed over a period of time, and depending on the current circumstances, I may or may not take action. For example, take the recent action of Sembcorp Industries (SCI). I had initially purchased SCI because of the potential growth of its utilities business, as well as its decent dividend yield. However, it has come to my attention that the utilities business may take a couple of years to bear fruit. This I cannot afford to keep my limited fund tied up with the stock, so I took action and liquidated it. The reasons for buying the stock had failed to materialise. Yes, indeed it could do so in the next few years, but time is the essence for me, and I cannot afford to keep funds tied down until I have accumulated enough to really invest for keeps.

The current bull run is likely to continue, and I cannot predict when it will end. Rather, I would continue to be as nimble as possible, navigating the volatile market while keeping as little of continued exposure in the market as possible. My accumulation target is probably 150-200k within the next 4-5 years, and until then, I will continue to monitor the market for potential opportunities of speculation or dividends.