39% Dividend Yield?

Apologies for the clickbaity title, but it’s true (for now). And 39% is an understatement; not counting the 30% withholding taxes (I guess you may know where this counter is listed at), the current yield is sitting at around 56%¹.

Introducing KLIP

 

So, what is this marvellous counter?

 

It is the KraneShares China Internet & Covered Call Strategy ETF (ticker: KLIP), listed on the NYSEARCA.

 

Incepted early this year, KLIP is an income-focused ETF that provides a monthly dividend to investors by writing options on its own sister ETF, the KraneShares CSI China Internet ETF (ticker: KWEB).

 

I had written how covered call ETFs work and vested in one of them, but to put in summary covered calls, though having a limited upside due to its nature, works well in times of market volatility. The past years had seen the Chinese technology and internet-related firms going through a roller coaster, partially in due to the sector’s regulatory crackdown and semi-conductor sanctions, etc., so in a way it plays into KLIP’s strategy.

 

Listed on 12 Jan 2023, KLIP’s price to date is down by about 33%, but with dividends propping it up, a Singaporean investor vested from the beginning would have a net gain of around 2.7% after taking in withholding taxes and without dividend reinvestment. From the fund fact sheet², the total annual fund operating expense sits at 0.95%, which is relatively high as compared to RYLD’s 0.6%. The ETF’s net assets are around USD 120 million.

Let us compare with the sectoral equivalent Global X Nasdaq 100 Covered Call ETF (ticker: QYLD), in terms of performance over the same period (i.e., from 12 Jan 2023); QYLD price was up by 3.3%, a current yield of 7.7% (30% withholding taxes applied) and an overall gain of 10.3%³. Despite the lower yield, QYLD had performed better than KLIP; these are two dimensions from which dividend investors must understand: Firstly, total returns included capital gains and income derived. Secondly, yield is a ratio of dividends over price, and a higher yield does not imply higher dividend amounts.

 

However, it would be unfair to compare these two as such, due to QYLD’s longer history (incepted on 11 Dec 2013), and how the technology and internet sectors (and the overall economy) of China would fare in the future.

 

The Bedokian’s Thoughts

 

If you had noticed, this blog post is not written under the “Inside The Bedokian’s Portfolio” series, which means I have yet initiated a position and I am keeping watch on this. Understandably, KLIP is attractive with a high yield. One could imagine that the counter could get “freehold status” (i.e., common speech amongst dividend investors of the distributions paying off the initial capital amount) in three years. Comparatively, it is one of the highest yielding covered call ETFs I had encountered.

 

However, over the past 11 months, both price and dividends were undulating, thus the “freehold” concept would be very dependent on one’s entry price and the subsequent yield derived. This point, from another angle, makes it tricky to capture higher yield at a given entry price and dividend income. Being less than a year old, the track record runway is considered short. 

 

Granted that a lot of covered call ETFs did not surpass their listing launch price, the Bedokian’s approach to them is to enter them on a “nibbling” basis and to obtain the yield to either reinvest back onto the ETFs or as dry powder for other U.S. counters. Being derivative in nature, such ETFs are placed inside our trading portfolio instead.

 

1 – Current yield is based on the total monthly dividend payouts between Jan and Nov 2023 of USD 9.336 divided by the price of USD 16.63 as of 1 Dec 2023. Dividend reinvestment not considered. Sourced from Yahoo Finance.

 

2 – KraneShares China Internet & Covered Call Strategy ETF fact sheet. 31 Oct 2023. https://kraneshares.com/resources/factsheet/2023_11_15_klip_factsheet.pdf (accessed 3 Dec 2023)

 

3 – Current yield is based on the total monthly dividend payout between Jan and Nov 2023 of USD 1.877 divided by the price of USD 17.07 as of 1 Dec 2023. Closing price of QYLD as of 12 Jan 2023 was USD 16.52. Dividend reinvestment not considered. Sourced from Yahoo Finance.

ZIRP Is An Anomaly

For the United States (U.S.) federal funds interest rate, the period between 2009 and early 2022 (besides a short period between 2017 and early 2020) was known as the zero-interest rate period, or ZIRP, as a response to and result of one of the biggest financial events known as the Great Recession. Although “zero” was not technically correct, the rates were hovering near the zero line (see Fig. 1), thus I guess that was why it gave the acronym. During this period, debt was cheap, and with it fuelled huge purchases of assets and accelerated growth of capital.

We see this happening here in Singapore, too, especially on the property front. As the U.S. interest rates are positively correlated to Singapore’s (see Fig. 2), our average overnight interest rate (equivalent to the U.S. federal funds rate) was also near zero at around the same time, we had seen a huge demand for local properties simultaneously.

Fig. 1: 25-year United States Fed Funds Interest Rate (source: Trading Economics)

 

Fig. 2: 25-year Singapore Average Overnight Interest Rate (source: Trading Economics)

 

For some Millennial (born 1981-1996), Generation Z (born 1997-2012) and late-blooming Generation X (born 1965-1980, like myself) investors, the ZIRP was the time when they had started their investment journeys. Due to the relatively extended period of ZIRP, the sense of it being a given was naturally entrenched in some of their investment philosophies.

 

However, if one studies the history of markets and economies, we know there are things called cycles, and with this ZIRP could not last long. In fact, ZIRP lasting this long was deemed an anomaly, since rates had not gone that low for the past 50 years. Interest rate has a role to play in the whole scheme of things, and it is the go-to tool to combat an overheated economy and the related phenomenon called inflation. We saw this happening when inflation started to go up hard in early 2022, attributed to major factors like the post-COVID19 supply crunch and the long ZIRP, and the U.S. Federal Reserve came down on it hard with spiking interest rates.

 

REITs

 

One asset class that was particularly hard hit by rising rates is real estate investment trusts (REITs). If remembered correctly, when rates were going up (known as quantitative tightening back then) in 2017, REITs, being leveraged, displayed a downward trend known as “taper tantrum” emerged, as it was seen the cost of debt would be going up. While rates stabilized sometime in 2019, REITs had gotten used to it and prices went back up to their valued norms.

 

The rates rise in 2017 could be seen as a precursor of what would happen if they went up again. Still, for 2022, the effects were more pronounced because of the rapid acceleration of rates increase and there was a return to ZIRP at the onset of COVID19. REITs that were highly leveraged were caught out, and with the added effects of risk premium compression, they got battered.

 

High Interest Rates Are An Anomaly, Too

 

Viewing from the other side of the coin, a high interest rate would not be sustainable in the long run. Due to the shock of the near-vertical climb, most were literally and figuratively caught with their pants down, as the market and economic models were still at ZIRP mode.

 

The next obvious question is, how high interest rates are supposed to be? Looking back at Fig. 1, rates were the same, if not higher, pre-2008. In all fairness, going back to that norm 15 years ago would be hard to swallow as of now, and this means “high” is more relative than fixed at a certain percentage.

 

We must understand that one of the functions of the Federal Reserve is to conduct monetary policy, and raising and lowering rates is a tool used to carry it out. They do not change the interest numbers on a whim, but rather based the decision on the latest economic data and reports presented. In other words, and as what famous fund manager Peter Lynch had mentioned, no one can predict interest rates, not even the Federal Reserve themselves.

 

Combining what was said in the last two paragraphs, interest rates would be normalized depending on the economic conditions of the time, and the rate percentage would be adjusted in relative to the last one. In summary, though staying at present levels is the norm back in 2007, it is deemed too high as of now. If reversion to the mean is followed, it would go down, eventually, to an average level.

 

Lock-Up Savings Accounts: An Idea To Stash Your Emergency Fund?

In response to the prevalence of online scams, the three major local banks DBS, OCBC and UOB had introduced lock-up savings accounts, where you could park your monies safely and they could only be withdrawn via physical means (either in person over-the-counter and/or ATMs – automated teller machines). 

Since the roll-out was just a couple of days ago, you could find out more from the respective banks (click DBS , OCBC , UOB).

 

Whilst reading up on the lock-up accounts, an idea sprang up: why not use them for starting up an emergency fund?

 

The gist is simple; the idea of the emergency fund is to tide over unexpected situations in life, such as sickness, unemployment of just about anything that would eat into your money. The advantages are two-fold: there is a behavioral disincentive in touching the fund, thus it is protected against frivolous spending, and the lock-down can also protect against scammers wiping clean your monies. 

 

However, as sometimes spillovers from the set quotas in the emergency fund are used to fuel investments and/or other savings, it would be a slight hassle to do the non-digital way of withdrawing. But hey, at least one could experience nostalgia by learning how to use an ATM and/or encountering the goings-on within the bank branch. 

Inside The Bedokian’s Portfolio: Haw Par Corporation Limited

Inside The Bedokian’s Portfolio is an intermittent series where I will reveal what is actually inside our investment portfolio, one company/bond/REIT/ETF at a time. In each post I will talk a bit about the counter, why I had selected it and what lies ahead in the future.

Today’s counter is a follow-up from the post about myself going back to prospecting after a while, and the counter selected is Haw Par Corporation Limited (Haw Par). This is a classic value/dividend hybrid counter in my opinion.

 

A Little More Than Just Tiger Balm

 

Haw Par’s main product is the ubiquitous Tiger Balm, which within it contains an assortment of ointments, patches and rubs for different uses ranging from the traditional kind (e.g., soothing of headaches) to relieving of muscle pains from sports. Being one of the known brands of analgesics, Tiger Balm is marketed in more than 100 countries around the world.

 

On top of ointments, Haw Par also has in its portfolio four commercial and light industrial properties (three in Singapore and one in Malaysia) and an underwater theme park (Underwater World Pattaya) in Thailand.

 

And there is another point on its other investments, which I will mention later.

 

Fundamental Analysis

 

Ratio Analysis

I will use the selection guideline from the eBook¹ and apply it to Haw Par’s ratios (as of 26 Nov 2023 of price SGD 9.75):

 

Equity Selection Guideline	Haw Par Corporation Limited
Price-to-Book Ratio of 1 and below	0.64
Debt-to-Equity Ratio of 50% and below	0.82%
Current Ratio 1.5 to 3	3.11 (deemed acceptable)
Price-to-Earnings Ratio being the 25% lowest amongst other companies within the same sector/industry	12.33 (as there were no other comparable companies within the local market, a judgement call made to deem acceptable)
Dividend Payout Ratio 25% and above	37.93%
Dividend Yield higher than 10-year average inflation rate (based on past 3 years)   Based on MAS figures of year-on-year CPI for the past 10 years, the average annual figure is 1.4%	Forward yield – 4.1% Trailing yield – 3.58% Yield figures from Dividends.sg between 2020 and 2022 were above inflation rate

 

From the table, Haw Par had passed the selection guideline.

 

Income And Cash Flow Analysis

 

From the excerpts of the income statements, the following gross profit margins (GPMs) and net profit margins (NPMs) were derived:

 

Year	GPM	NPM
2022	54.13%	81.45%
2021	52.16%	77.98%
2020	43.98%	107.87%
2019	57.15%	74.68%

 

Though numbers of the last three years were usually sought, I had added in 2019 to see a comparison between what is deemed to be a normal operations year and 2020 when COVID-19 struck.

 

The GPM were from profits of Haw Par’s main operations which are the Tiger Balm, properties and the underwater park. Across 2019 and 2020, the GPM was dented by around 23%, but it can be observed that it is heading for recovery from 2021 onwards. The half year result for 2023 had shown an increase of 16.3%² year-on-year, continuing the upward trajectory. 

 

However, what is surprising is that on top of the said operations, Haw Par also has other investment income from dividends, interest and share of profits from its associated companies, and these brought up the NPM to relatively high percentages. One could view Haw Par is a holding company of sorts, and it is really a bit more than just Tiger Balm.

 

Moving on to cash flow, it is positive and rather consistent from 2020 onwards, though it dwarfed when compared to 2019 and before. As long as the cash flows are positive and the variations are not wild (i.e., swing from negative to positive), I am alright with it. Furthermore, with almost no debt, interest rates, which are the talk of the town, are of little effect to Haw Par.

 

What’s Next

 

Once a brand known only in East Asia, Tiger Balm expanded globally and had formed a sort of moat. However, the other point of interest would be Haw Par’s investment income, and this had shown profitability based on past records. If the four income components (Tiger Balm, properties, underwater park and investments) are profitable, it would be a good hold for the next decade.

 

All figures are derived from Yahoo Finance and Haw Par’s annual reports unless otherwise stated.

 

Disclosure

 

Bought Haw Par at:

 

SGD 9.75 at Nov 2023

 

Disclaimer

 

1 – The Bedokian Portfolio (2^nd Ed), p103-106

 

2 – Condensed Interim Consolidated Financial Statements For The Half Year Ended 30 June 2023. 11 Aug 2023. https://hawpar.listedcompany.com/newsroom/20230811_171738_H02_P6PDPS9GN49RIN42.1.pdf (accessed 26 Nov 2023)

Going All-In Into Treasury Bills And Deposits?

With interest rates now at an all-time high since around 16 years ago, short term treasuries and bank deposits are providing a much safer and better deal in providing more bang for the buck (from a risk premium point of view). It is basically common sense; why would I want to plonk my monies in an investment with possible capital loss for maybe an additional 1-2% yield when I could put it in an almost-capital guaranteed place at an almost-guaranteed return?

Yet, investors (including myself) are going for the former, scrolling through numerous screeners, scrutinizing the ratios and financial numbers, getting knowledge on the company’s/sector’s/industry’s goings-on, and understanding the macroeconomics of the time, etc. I must confess it is hard work, and all these could be dealt away with by just applying the latest treasury bill and/or going down to the bank/financial institution that offered the best rates.

 

You can still do that, but for myself I would not switch 100% of my capital to them. As the adage goes, “Good times do not last forever”. We cannot expect that interest rates would stay high, and just like other forms of investments, they will go down eventually. This is because markets and economies go through a cycle, and other instruments would provide a better bang for the buck than treasuries and deposits. We need not look further than just two years ago when little people paid attention to them due to the low interest rate environment.

 

This is where we need to capitalise on the (deemed) only free lunch in the investing world, which is diversification. By diversifying, you can capture the prevailing highest return offered by an asset class / region / country / sector / industry / company on part of your investment portfolio, while at the same time protecting it from extreme drawdowns suffered by other asset classes / regions…etc.

 

Quoting the second part of the adage mentioned above, that is “Bad times do not last forever, too”, brings us to the diversification-related property of rebalancing. Depending on the preferred make-up, or asset allocation, of your investment portfolio, if an asset class begins to grow/decline beyond the set allocated level, you can either start selling/buying counters from that said asset class, or inject funds to buy up others, or both, to bring balance back to the portfolio.

 

Whilst some critics may say the method above reduces overall returns as compared to having a concentrated portfolio, which is correct, the main aim is to try to reduce as much risk as possible. Sure enough, we have had heard of success stories of investors/traders going all into one counter and reaped exorbitant profits, but what if the call was wrong? We cannot predict how the markets and economies turn out, and investing gurus and fund managers are not correct all the time, same as us retail investors. Thus diversification, rebalancing and asset allocation are a better defence against volatility and outright 100% capital loss (save for alien invasions and nuclear winters).

 

A final word for dividend investors: high interest rates are not favourable for equities and REITs due to high costs of leverage, and this brings a bargain for erstwhile healthy counters which were depressed overall by the situation. As we know current yield = dividend / current price, if the leverage is low, cash flow is strong and there are still profits, it is a good consideration to look at it further and swoop in if it is worth.

The Gold Rush

An article from the Straits Times a few days ago caught my attention, which read:

Singapore’s central bank the world’s third-largest gold buyer from Jan to Sept 2023¹

 

It reported that Singapore had purchased 75 tonnes of the precious yellow metal during the first nine months of the year. While sitting at third, the purchase was slightly dwarfed by the largest buyer, China (181 tonnes) and second-placed Poland (105 tonnes) for the same period. 

 

Gold is recognized globally and used by central banks as reserve assets, which could prop up the country’s currency and economy in times of need. The buying-up of gold by central banks had increased since 2022, with that year well over 1,000 tonnes were purchased, mainly fuelled by the Russo-Ukrainian conflict and soaring inflation then. The recent crisis in the Middle East had made the price of gold jumped to above USD 2,000 before settling down to the current USD 1,980-ish.

 

Photo credit: istara from pixabay.com

The Importance Of Gold

 

Gold is usually seen as a safe haven by many investors, which explained its price spikes in times of uncertainty. Yet it is an asset which, unlike most other asset classes, does not provide growth in terms of yield.

 

For The Bedokian Portfolio, gold comes under the category of commodities asset class, which also includes silver and oil. Commodities (especially gold) forms as a dampener in reducing volatility and stabilizing the overall portfolio, as demonstrated in my post here.

 

I had described the various ways of owning gold in the eBook², but since this post started off from the news of central banks buying gold by the tonne, it would be appropriate for me to share on the various aspects of owning physical gold.

 

Owning Physical Gold

 

Before going in, you must be clear on the objective of owning gold; you are owning based on the market value of the commodity, nothing else. Thus, if the design of the gold bar/coin intrigues you and you are willing to pay (very much) extra for it, then it would be in the alternate investment form of collectibles called numismatics. These should not be in your normal investment portfolio but be held in a separate one instead.

 

That aside, let us go into the key points of owning the metal itself.

 

Find a reputable dealer/bank

 

This would be the first thing in my mind before going around and buy gold. Recent years had seen several bullion dealers setting up shop in selling physical precious metals, which is good as there is a freedom of choice and comparison. As a rule of (my) thumb, a dealer with a physical shop, and with a few years’ presence is preferred. Also, it should carry some gold from LBMA (London Bullion Market Association, more on this later) accredited refineries and mints.

 

If your trust level is for dealers are still low, perhaps you could try out the banks. To my knowledge, United Overseas Bank (UOB) is the only bank that sells physical gold over the counter, but only at UOB Plaza in Raffles Place (disclaimer: I am not sponsored by UOB).

 

Know the form and weight

 

Physical gold comes in two forms: bars and coins, which are both self-explanatory. Within the bar itself, there are two sub-types: cast and minted. Cast bars looked rugged and rough, while minted ones are more refined looking, hence the former would have a lower premium (see later) than the latter.

 

Next up, there are different weight (or mass, for those who are particular on the term) steps; the smallest is one gram, while the largest can go up to one kilogram. Though some of the weights are in metric, there are also weight steps in imperial system called troy ounces (oz), as international gold prices are determined per oz.

 

The premium

 

One of the main disadvantages of getting physical gold is you cannot buy it at its spot price. This is fair as the refinery/mint would need to bear additional costs for smelting, packaging, transport, etc. Since we are investing on the value of gold itself, we would try to look for physicals that has the lowest premium over spot.

 

Other than cast and minted conditions (for bars), the weights do play a part in premiums. Ideally, the heavier the weights, the lower the premium portion of the overall cost. For example, using gold prices and USDSGD exchange rate on 6 Nov 2023, and using a dealer’s online prices, a one-gram bar’s premium is about 33% over spot, as compared to 0.4% for a kilogram.

 

Of course, for retail investors it would be a tall order to get a kilogram of gold (commonly referred to as kilobar), so the sweet spot for premium would be to keep it within 5%. For myself, it would be minimally 1 oz, which is around 3.2%, and I could make a quick check of gold prices since it is based on oz.

 

LBMA

 

The LBMA is a trade association that governs the standards for the global wholesale market for precious metals, and that includes their purity. If a refinery/mint is a member of the LBMA, it would be subject to the rigour of the LBMA and thus the gold bars and coins produced would be of the highest standard that could be traded (and of investment grade quality). Additionally, in Singapore, physical gold that are LBMA approved would be exempted from the Goods and Services Tax, therefore there would be additional cost savings.

 

Storage

 

Physical gold being a tangible asset requires the use of storage. If the quantity is small, you can keep it at home (or other storage options such as a bank safe deposit box), or if the quantity is large, you can engage with the dealer to use their storage facility, though this would bring additional costs.

 

Other administrative stuff

 

Some nitty gritty stuff before I sign off from this post. First, an invoice/receipt is issued whenever you buy a physical. Keep this piece of document as it is needed when you decide to sell it back to the dealer/bank or other dealers. Second, for minted bars, it normally comes in a package denoting the serial number and an assayer’s (an entity that tests the metal’s purity) verification. Do not remove it from the packaging as doing so would make the trade-in difficult as the dealer has the right of not accepting it.

 

I hope the above would provide some helpful tips in starting your physical gold journey. Remember, gold is just one of the assets for your investment portfolio, and diversification is still important on the overall scheme of things.

 

1 – Tan, Angela. Singapore’s central bank the world’s third largest gold buyer from Jan to Sept 2023. The Straits Times. 2 Nov 2023. https://www.straitstimes.com/business/singapore-s-central-bank-is-the-world-s-third-largest-gold-buyer-from-jan-to-sept-2023 (accessed 6 Nov 2023)

 

2 – The Bedokian Portfolio (2^nd Ed), p38-41

REITS Follow-Up

Following up from my post on REITs here on 20 Aug 2023, where I had named three REITs that I would look to add positions to, and I had managed to buy into them since then, namely:

• Frasers Logistics & Commercial Trust (FLCT) (21 Aug 2023, SGD 1.16)
• Paragon REIT (Paragon) (15 Sep 2023, SGD 0.895)
• Frasers Centrepoint Trust (FCT) (20 Oct 2023, SGD 2.06)

 

The prices for FLCT and Paragon had since gone further down, due to the foreseeable sustained level of current interest rates spooking the REIT (and in general property) asset class. It is a heartache but as I had mentioned, it is impossible to catch the bottom and low can go lower. For disclosure, as of 25 Oct 2023, our overall position based on price (no dividends) for FLCT, Paragon and FCT stood at -4.83%, -11.3% and +2.76% respectively.

 

Two main developments had occurred after my 20 Aug 2023 post, and both came from FCT. First is the near-total divestment of their Hektar REIT holdings. The second is the divestment of Changi City Point, in which the latter’s disposal would bring FCT’s aggregate leverage down from 40.2% to 37.1%, improve hedge ratio of fixed interest rates from 63% to 73%, and reduce average cost of borrowings from 3.7% to 3.6%. These are good statistics in the wake of high interest rates.

 

With prices of FLCT, Paragon and FCT (25 Oct 2023) standing at SGD 1.03, SGD 0.80 and SGD 2.11 respectively, I would be more inclined in adding more Paragon, as FCT is hitting our portfolio’s 12% limit and FLCT’s high exposure to overseas properties.

 

Disclosure

 

The Bedokian is vested in FLCT, Paragon and FCT.

 

Disclaimer