Should we invest in Singapore for dividend income?

This post was created in partnership with Nikko Asset Management Asia Limited. All views and opinions expressed in this article are Beansprout's objective and professional opinions.

I came across an interesting discussion in the Beansprout community recently.

There was a question – “Is the Singapore market worth looking at for income investors?”.

Someone suggested the Straits Times Index (STI) as a way to generate dividend income for investors with its generous dividend yield. 

This was compared with other popular investment options like Singapore Real Estate Investment Trusts (REITs), Treasury Bills (Singapore T-Bills), and Singapore Savings Bonds (SSBs).

Let us find out more about the dividend potential of the STI and how it stacks up against other options. 

Understanding the Straits Times Index (STI)

The Straits Times Index (STI) tracks the performance of the 30 largest companies listed on the Singapore Exchange (SGX).

These companies are leaders in their respective industries and offer a snapshot of the overall market performance.

Some of the well-known companies in the STI include DBS, UOB, OCBC, SIA and Singtel. 

The STI recently reached a 6-year high of above 3,500, after staying largely in the range of 3,000 to 3,500 since 2021. See chart below.

The STI generated a 5-year cumulative total return of 24.0% as of 28 June 2024, which represents an annual total return of 4.4%. See table below.

This compares to a 5-year cumulative total return of 18.8% of the FTSE ST All-Share Index. The FTSE ST All-Share Index is a market capitalisation weighted index that tracks the performance of companies listed on SGX that are within the top 98% (by market capitalisation). 

As the STI has been largely range bound over the past 5 years, a significant proportion of the total returns would have come from the dividend returns of the index. 

What is the Dividend Yield of the STI?

Clearly, one of the attractive aspects of investing in the STI is its dividend yield. Historically, the STI has provided attractive dividend yields, often ranging between 3% to 5% (Source: Bloomberg, January 2024). 

Currently, the dividend yield of the STI is at 4.8% (Source: Bloomberg, August 2024). 

Based on the average dividend yield across the last 10 years, the STI offers one of the highest dividend yields when compared with other global market indices (Source: Bloomberg, January 2024). 

As of 7 August 2024, the STI generated an average dividend yield of 3.94% across a 10-year period^ (Source: Bloomberg, August 2024). This is above the dividend yield of other major indices, such as the Hang Seng Index and the S&P 500 Index (see chart below).

What are the advantages of investing in the STI for dividends?

Diversification 

Investing in the STI offers diversification across multiple sectors and companies, reducing the risk associated with investing in a single stock. This diversification can help smooth out volatility and provide a more stable income stream.

Regular Income 

A number of the STI's constituent companies are well-established firms with a history of paying consistent dividends. This may provide investors with a reliable source of income, which is particularly appealing for retirees or those seeking passive income.

For example, DBS offers a 12-month trailing dividend yield⁴ of 5.2% and Mapletree Pan Asia Commercial Trust offers a 12-month trailing dividend yield^ of 6.2%, based on SGX Stock Screener as of 28 July 2024. See chart below.

⁴The trailing dividend yield shows a company's actual dividend payments relative to its share price over the previous 12 months.

Potential for Capital Appreciation

While the primary focus of this article is on dividends, it is worth noting that the STI also offers potential for capital appreciation. 

The STI has generated total returns in excess of its dividend returns over the past 5 years (source: FTSE as of 28 June 2024), providing investors with the opportunity to benefit from both income and capital gains.

What are the risks of investing in the STI for dividends?

Market Volatility 

As with any equity investment, the STI is subject to market volatility. Economic downturns, geopolitical events, and sector-specific challenges can all impact the performance of the index and, consequently, the dividends paid by its constituent companies.

For example, the STI fell by 8.1% in 2020 due to the Covid-19 pandemic, before recovering by 13.6% in 2021. See chart below.

Dividend Cuts 

While a number of STI companies have a strong dividend-paying history, there is no guarantee that dividends will remain consistent. Companies may cut or suspend dividends during tough economic times to preserve cash flow. For example, some companies lowered their dividends in 2020 during the Covid-19 pandemic. 

Sector Concentration 

Although the STI is diversified, it is heavily weighted towards certain sectors, such as financial services and real estate. 

Based on the sector breakdown as at 28 June 2024, banks would represent more than 50% of the STI, while the real estate sector, which is mainly made up of the REITs, would represent 16.5% of the index. See chart below.

This concentration can expose investors to sector-specific risks, such as regulatory changes or economic shifts impacting these industries.

How does the STI compare to Singapore REITs? 

Singapore REITs have gained popularity due to their high dividend yields and exposure to the real estate sector, including retail, office, industrial, and hospitality.

REITs in Singapore are known for their generous dividend payouts, with an average dividend yield of 8.1% (Source: Bloomberg, SGX Securities as of 28 June 2024). This would exceed the dividend yield of the STI.

Singapore REITs present their own risks, and their distributions depend on property market trends and management efficiency. REITs can be sensitive to interest rate changes and property market cycles.

As such, the STI would be more diversified compared to Singapore REITs, as the largest sector represents just over 50% of the entire index, while real estate (including REITs) would represent about 16.5% of the index. See previous chart above.

How does the STI compare to Singapore T-Bills?

Some income investors may like to compare the dividend yield of the STI with the yield on the T-bill or interest rate on the Singapore Savings Bonds (SSBs).

Here, it is important to note that investing in the STI is inherently different from investing in the T-bill and SSB. There are hence a few key points that I would bear in mind when comparing these instruments. 

Firstly, the STI may have higher price volatility as its constituents are stocks. On the other hand, T-bills and SSBs are seen to be safer investment options as debt instruments issued by the Singapore government. Hence, the yields for T-bills and SSBs are typically lower than the STI due to this trade-off.

Singapore T-Bills are short-term government securities with maturities of one year or less. They are considered one of the safest investment options, backed by the Singapore government.

Singapore T-bills are typically preferred for investors looking to preserve capital and earn modest returns.

However, the Singapore T-bill yield is lower than the STI dividend yield. The cut-off yield for the latest 1-year Singapore T-bill is 3.38% (Source: MAS, July 2024), below the dividend yield of 4.8% for the STI (Source: Bloomberg, August 2024). 

How does the STI compare to Singapore Savings Bonds (SSBs)?

SSBs are a long-term investment product issued by the Singapore government. They offer a step-up interest structure, with interest rates increasing the longer you hold them.

SSBs provide returns that gradually increase over time, and offer flexibility with the option to redeem without penalties. 

As SSBs are low-risk and highly liquid, they may appeal to conservative investors looking for a consistent payout. 

In the latest SSB issued in August, the 1-year return was 3.19%, while the average 10-year return would be 3.22% (Source: MAS), below the current dividend yield of the STI (Source: Bloomberg, August 2024). 

In summary, the following is how I would compare the STI with REITs, T-bills and SSBs.

What would Beansprout do?

The STI offers one of the highest historical dividend yields over the past 10 years when compared with other global market indices. 

This is supported by the consistent dividend payout of well-established companies in the index. In addition, the STI offers the additional benefit of diversification compared to investing in single stocks. 

Hence, I would see that investing in the STI for dividends offers a balanced approach with moderate yields and growth potential. 

Investing in the STI can be done through exchange-traded funds (ETFs) that track the index, such as the Nikko AM Singapore STI ETF. 

This provides a convenient and cost-effective way to gain exposure to the entire index without having to buy individual stocks.

Balancing the STI with other investment options, such as REITs or bonds, can help create a more resilient and diversified investment portfolio.

Singapore REITs currently offer a higher dividend yield compared to the STI, but offer less sector diversification. To gain exposure to a basket of REITs including Singapore REITs, we can consider the NikkoAM-StraitsTrading Asia ex Japan REIT ETF. 

Lastly, Singapore government bonds such as T-Bills are safer options with lower yields but more stable returns. 

The ABF Singapore Bond Index Fund allows us to earn passive income⁵ through a diversified portfolio of Singapore government bonds, and some potential capital appreciation should interest rates start to fall. 

Lastly, if you would like to gain exposure to the bond issuances of Singapore blue chip companies, then it might also be worthwhile looking at the Nikko AM Investment Grade Corporate Bond ETF. 

The ETF offers access to the Singapore dollar-denominated corporate bonds with a relatively low risk of default, and its holdings as of 28th July 2024 include the bonds issued by DBS, UOB and OCBC Bank*. 

Learn more about each of these ETFs through the links below:

• Nikko AM Singapore STI ETF
• NikkoAM-StraitsTrading Asia ex Japan REIT ETF
• ABF Singapore Bond Index Fund 
• Nikko AM Investment Grade Corporate Bond ETF

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