Do Not Underestimate The Power of Dividends

One of the underlying principles of The Bedokian Portfolio is in dividends (with bond coupons and bank interests included), which is why the tag line for it is “passive income through dividend and index investing”.  Dividends serve as the compounding effect in the early part of portfolio building, and then later as passive income when one is ready to retire.

On a shorter term, dividends can magnify your gains and mitigate your losses. Here’s how.

You May Be Earning More Than You Think

Take for instance the SPDR STI ETF, one of the ETFs that track the Straits Times Index, which is considered to be the proxy for the local equity market. If you had bought 10,000 shares of the ETF on 4 Jan 2010 (the first business day of 2010) at $2.97¹, and the price of it on 20 Apr 2018 was at $3.57², you would have made ($3.57 x 10,000) – ($2.97 x 10,000) = $6,000.

However, if you factor in the dividend component for that same period, and assuming that your number of shares remains at 10,000 throughout, your dividend amount would be $7,520³. Therefore if you realise your gains today, you would have made about 45% of your initial investment made eight years ago.

Let us use the ABF Singapore Bond Fund, which is deemed as the de facto local bond ETF used by many investors, as another example. Using the same dates and number of shares as per the SPDR STI ETF example above, you would have only made ($1.12 x 10,000) – ($1.10 x 10,000) = $200, a paltry sum⁴. But, if you include its distributions, you would gain $1,648⁵, still substantially more than the capital gain. 

With dividends factored in, you may be earning more than you think.

You May Be Losing Less Than You Think

Returns = Capital gains/loss + income.

This is the formula that we know for returns. The income component would be the dividends. So, in the event of a capital loss, we could still get positive returns if the income component is larger than the loss. Also, in the event of negative returns, the positive income part could help mitigate the overall loss.

Now brings the part of the terms realised and unrealised gains/losses. Realised means that the gains/losses are materialised and the investment concerned has been transacted for the monetary value. Unrealised means that the gain/loss exist on paper value and this value could change from a gain to a loss or vice versa depending on the price of the investment.

Back to the returns equation, as long as the investment is not sold off, capital gain/loss is unrealised, but the income component is always realised, since the dividends/coupons/interest earned is already in your pocket. 

So, in the event of overall negative returns, you may be losing less than you think.

1, 2 – Yahoo Finance. SPDR STI ETF. https://sg.finance.yahoo.com/quote/ES3.SI?p=ES3.SI(accessed 22 Apr 2018). Closing price of the day is used.

3 – State Street Global Advisors SPDR. SPDR Straits Times Index ETF (ES3). Dividend Information. http://www.spdrs.com.sg/etf/fund/spdr-straits-times-index-etf-ES3.html(accessed 22 Apr 2018). Dividend payouts between 2 Feb 2010 and 20 Feb 2018 are used.

4 – Yahoo Finance. ABF Singapore Bond Index Fund. https://sg.finance.yahoo.com/quote/A35.SI?p=A35.SI(accessed 22 Apr 2018). Closing price of the day is used.

5 – Dividends.sg. ABF Spore Bond Index Fund ETF (A35). https://www.dividends.sg/view/A35(accessed 22 Apr 2018). Dividend payouts between 15 Oct 2010 and 15 Jan 2018 are used.

Bedokian Portfolio In Graphics

A graphical look on some of the important points mentioned in The Bedokian Portfolio ebook.

Diversification Levels

Bedokian Portfolio Allocation

Fundamental Analysis Levels

Tariffs, Tit-for-Tats and Trade Wars

Recently the financial markets are jittery over trade issues between the two largest economies of the world, China and the United States. With figurative blows at each other, the markets are experiencing a roller coaster ride of sorts. Over the past five days from 2 Apr to 6 Apr, the S&P 500 index swung between 2558 and 2671 points¹, while our STI fluctuated between 3339 and 3445 points².

While it is not confirmed whether some or all of these tariffs will come to fruition, such news could bring butterflies to most stomachs. Though some may consider these market swings as minor, in reality we do not really know what is in store for investors in the future. So in case of a trade war happening, what should we do about it?

Think Regional and Country

Though the atmosphere of the markets may be pessimistic, there are some places in the world that are not affected by tariffs totally. Since tariffs work on imports and exports, economics 101 dictate that if goods from a certain place get more expensive, it would be natural to source them cheaper from another location. This “another location”, in turn, would reap the benefits, ceteris paribus.

For example, Australia is seen as one of the likely beneficiaries if a trade war happens, as it could provide what is on China’s tariff list of American products, such as wine, steel, etc³. Also, China’s proposed tariffs on American soybean imports may prompt Chinese buyers to source the beans from elsewhere, which could be Brazil or Argentina, the next largest producers⁴.

With this information, you could consider investing in counters and ETFs that has exposure to these regions and countries.

Think Domestic

Ironically, we could also look at the domestic markets of China and the United States. Sounds oxymoronic? Not really. Again a reminder, tariffs affect imports and exports, so we could look at sectors and companies in those countries that have minimal exposure to the items on the tariff list.

Goldman Sachs recommended companies that have large domestic sales exposure⁵. This seems to be a legitimate reason as the revenues of such companies are not affected by trade wars, since their customer base is mostly from within.

Thought, Final

Overall the strategy and maintenance of the Bedokian Portfolio in terms of your preferred asset allocation, as well as the basic rules such as the 12% limit⁶ still holds paramount. Furthermore, we do not know if the looming trade war is ever going to happen. In investing, the most important thing is to stay calm and react accordingly should any event occurs.

1 – Yahoo Finance. S&P 500 Index, 2 – 6 April 2018. https://finance.yahoo.com/quote/%5EGSPC/ (accessed 7 Apr 2018)

2 – Yahoo Finance. STI, 2 – 6 April 2018.  https://sg.finance.yahoo.com/quote/%5ESTI/ (accessed 7 Apr 2018)

3 – Neuman, Scott. Who Wins A U.S. – China Trade War? Maybe Australia. National Public Radio. 3 April 2018. https://www.npr.org/sections/thetwo-way/2018/04/03/599081151/who-wins-a-u-s-china-trade-war-maybe-australia (accessed 8 Apr 2018)

4 – Karuga, James. 10 Countries With Largest Soybean Production. Worldatlas. 25 April 2017. https://www.worldatlas.com/articles/world-leaders-in-soya-soybean-production-by-country.html (accessed 7 Apr 2018)

5 – Kim, Tae. Goldman Sachs says here’s where to invest during a global trade war. CNBC. 4 April 2018. https://www.cnbc.com/2018/04/04/goldman-sachs-on-where-to-invest-during-a-global-trade-war.html (accessed 8 Apr 2018)

6 – https://bedokianportfolio.blogspot.sg/2016/10/the-12-limit.html