Man… what a week!
The biggest rate hike since 1994, an implosion in the crypto space, and JGB yields blowing up.
It’s starting to feel like the summer of 2008.
That sickening feeling you get that the tail risks are starting to build.
But when and where exactly it blows up, you have no clue.
I hate to say I told you so – but here on Financial Horse, I’ve been going on and on since Jan 2022 about how tightening liquidity will wreck financial markets this year.
Well – it’s playing out exactly as I described so far.
Given how things are playing out, it’s probably wise to start doing a bit of homework on what Dividend Stocks I want to buy if (when) the liquidity event hits.
Rules: 5 Best Dividend Stocks to buy in 2022’s Market Crash
We are now in Dec 2022.
The Fed Funds Rate is at 3.5%.
Stocks and financial assets have been crushed (or are in the process of getting crushed).
What do you buy, and at what price?
I’ll try to be as realistic as I can with the price targets. Nothing absurd like DBS at $5.
5 Best Dividend Stocks to buy in Singapore in 2022
1. Netlink Trust
Current Price: $0.93
Dividend Yield: 5.5%
Netlink Trust as a dividend stock is boring as hell.
I mean look at it’s share price, it has literally gone nowhere for 2 years.
But with my dividend stocks, the more boring the better.
As long as the share price is stable, it pays a good dividend, I am happy.
Netlink Trust owns most of the fibre connections in Singapore, and they “rent” out the connections to service providers like M1 or Singtel to use.
So every month that you use a fibre connection for internet at home, you’re paying “rent” to Netlink.
It’s the REIT of fibre connections.
Problems with Netlink Trust as a Dividend Stock
The problem though is that with a business like that, there’s only 2 ways to grow: (1) more users, (2) higher prices per user.
(1) is out because most of Singapore is already on fibre, so you’re basically just tracking population growth at this point:
(2) is also out because internet prices are tightly regulated in Singapore, and Netlink cannot raise prices without IMDA approval.
At best you’re looking at low single digit increase in prices each year.
That’s good for internet users, bad for Netlink investors.
Any tail risks?
A lot of you have been writing in with concerns about Netlink Trust’s rising expenses.
And yes absolutely – I agree this is a big tail risk.
If the underlying fibre has some issues that require big capex from Netlink, the dividend could get cut.
But I mean, there’s really no free lunch in this world.
If you want a dividend yield above the risk free, you have to accept some level of risk with it.
Netlink Trust does have a pretty rock solid balance sheet though, so that helps.
My Target Price for this Singapore Dividend Stock?
The tricky part about Netlink is figuring out the right price to buy it at.
The lowest that it went during the March 2020 liquidity crunch was $0.80.
If it goes there (6.4% yield) I am probably backing up the truck.
But more realistically, I think $0.85 might be good enough for me. At that price, it works out to a 6% yield.
That’s similar to what I’m getting on my Class B Astrea 7 Bonds, and broadly speaking I think the risk associated with both is somewhat similar.
Class B Astrea 7 is probably safer from a micro perspective (because of the diversification), but you do take on USD FX risk in exchange.
Current Price: $30.11
Dividend Yield: 4.7%
I don’t think DBS Bank needs any introduction.
It’s the biggest bank in Singapore, Temasek backed, and probably one of the best ways to invest in Singapore’s economy.
Oh… and did I mention that it pays a 4.7% dividend yield at current prices?
That’s REIT levels of yield.
Will DBS Bank cut its dividend in a recession?
I always get the question of whether DBS Bank will cut its dividend in a recession.
I don’t know what you guys are smoking, but in my mind the answer is a resounding hell yes.
You see banks are a tail risk kind of business.
In the good times you make truckloads of profit lending out money at a spread (against your borrowing cost).
In the bad times though – your borrowers default.
So that $1 billion loan you were making 1% spread a year on? You only recover $100 million, and you eat a $900 million loss.
Just look at what happened to DBS’s dividend in 2020:
And don’t forget COVID 2020 wasn’t even all that bad (from a loan default perspective) because the government stepped in and bailed out the entire economy with emergency support.
DBS currently has a 50% dividend payout ratio.
If we get a real recession, and we don’t get the same level of policy support we did in 2020, things can get ugly.
What price would I buy this Dividend Stock at?
I still remember writing an article about selling DBS Bank earlier this year.
DBS Bank was trading at $36 then, and I said that at low 20s I would be a buyer.
I remember being laughed out of the room then.
Well… who’s laughing now?
For the record though, I still don’t know for certain if DBS Bank will go back to the low 20s.
Much will depend on the inflation outlook in 2H 2022, which still isn’t very clear right now.
All I know is that the last time I backed up the truck, DBS was below $20.
Book value is $22, so if it goes anywhere near there I would consider buying (approx. 6.5% yield at those prices, assuming no dividend cut).
If it doesn’t, I’ll probably just hold my existing position and buy the REITs instead.
Will DBS Price drop more?
Food for thought – here’s the year to date chart of DBS (blue) against JP Morgan (Red).
DBS is massively outperforming JP Morgan, down 8% vs 27% for JP Morgan.
Is Piyush that much better a CEO than Jamie Dimon? Or do DBS prices need to come down?
You tell me.
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Current Price: GBP2,227.50
Dividend Yield: 3.4%
Okay I cheat.
Shell isn’t exactly a Singapore dividend stock.
But I wanted to add a dividend stock that can hedge inflation in the event that inflation refuses to come down.
And the options were either Olam, or going international. I went with the latter.
In my mind – Oil is the purest hedge on inflation.
Oil powers the entire physical economy. Everything goes back to oil.
Need bunker to power your cargo ships? Gasoline to air freight cargo? Petrol to drive your trucks and cars? Diesel to drive your farming tractor?
Heck, even the fertilizer to grow crops comes from the Haber process which requires natural gas (and loosely linked to oil).
But FH… Oil Prices are at record highs
If you look at the long term oil price charts, you’ll find they are close to all time highs.
But if you adjust those numbers for inflation, the charts tell a very different story:
The 2 previous mega cycles for oil, in the 1970s and 2000s, lasted almost an entire decade.
We’re only 2 years into the current oil cycle, which indicates there could be more room to run.
Structural Demand-Supply mismatch
This is the oil futures chart, which shows you how the market is pricing oil from tomorrow all the way to 6 years out.
And from Dec 2021 until now, the price of oil for immediate delivery has soared from $70 to $120. But the price of oil for delivery in 5 years out?
Barely even budged.
Oil Producers make decisions on long term prices
Imagine you’re an oil executive.
Any new investment in oil supply will not come online for at least 3 to 5 years.
And the market is telling you that oil prices in 3 to 5 years are still very low.
At the same time, politicians keep going on and on about ESG and how net zero emissions is the way of the future.
Are you really going to go to your board and ask for approval for that new $5 billion dollar oil rig that only comes online in 5 years?
Get out of here.
Will oil stocks drop?
But that’s the mid term, 3 – 5 year picture.
In the immediate, 6 – 12 months ahead, we still have a very aggressive Federal Reserve, and a very real chance of global recession.
Personal view – I think commodities and real estate are the last domino to fall in this cycle.
If (when) that happens, I would be looking to buy.
I think oil in particular could do very well this decade, because of underinvestment in supply. All the Russian sanctions are really not helping either. And I don’t think the transition to green energy will be as straightforward as made out to be.
Other Dividend Stocks to invest in Oil?
I picked Shell because if you buy the London listed stock there is no dividend withholding tax for Singapore investors.
And price wise it hasn’t appreciated as much as the US oil majors like Exxon or Chevron.
If you really wanted to be cute the China oil plays like CNOOC or Petrochina are worth looking at too.
There is China risk, and sanctions risk, but they do trade at a discount to their international peers.
Current Price: $3.62
Dividend Yield: 4.1%
Full disclosure that I’ve taken profit and sold my entire position in CapitaLand Investment.
I like the stock, and the dividend is decent at 4.1% too.
But I still think real estate is going to be one of the last dominos to fall in this cycle.
As a real estate investor there’s nothing you fear more than rising interest rates, and the pace of increase this year is the fastest its been in 25 years.
Doesn’t hurt to cash out and watch things play out a little.
What price will I buy this Singapore Dividend Stock?
But at the right price, I could be tempted to buy back in again.
My target price is $3, which would work out to a 5% yield.
It’s probably a bit aggressive being a 20% drop from here.
But like I said, I really don’t know how things are going to play out.
I’m just going to stay nimble here.
If CapitaLand Investment sells off, I buy it. If the REITs sell off instead, I buy the REITs instead.
I’ll take my cues from the market for this one.
Current Price: $2.76
Dividend Yield: 5.4%
Okay I get that Ascendas REIT is not a dividend stock but a REIT.
But frankly, this list just didn’t feel right without including a big name REIT in it.
The bulk of the portfolio is Singapore industrial properties, which is exactly what I wanted to get exposure to as I’m underweight this asset class.
The line in the sand for me is 6% yield, which is about $2.5.
I would be watching closely for that price, which corresponds to the bottom in 2018.
That said, in a true market crash there’s no telling how low prices can get.
Ascendas REIT went as low as $2.2 in March 2020, so that’s another level to watch.
5 Best Dividend Stocks to buy in Singapore in 2022
To sum up, the 5 Best Dividend Stocks to buy in Singapore in 2022:
- Netlink Trust
- DBS Bank
- Shell (or other oil major)
- CapitaLand Investment
- Ascendas REIT
Why buy Singapore Dividend Stocks?
The thinking behind dividend stocks of course, is that these tend to be mature, cash flow heavy businesses.
In a decade that may be inflationary (potentially stagflationary) in nature, dividend stocks are a good hedge.
Unlike growth stocks, the dividend (and cash flow) provides a bottom for stock prices.
That said, I don’t think dividend stocks are the only way to play the eventual recovery.
At some point, tech stocks could be a good buy too. As are commodities, gold, growth, small cap, crypto etc.
If you’re keen, you can check out my stock / REIT watchlist on Patreon. Will be updating it this weekend given how much prices have moved, and will revise all my personal price targets as well.
You also get access to my full personal portfolio.
Closing Thoughts: When to buy?
It’s been a monster of an article, so I want to wrap up.
Been getting a lot of questions on when the market will bottom.
What I will say, is that I think we’re very close to peak rates. I think after this final flush out, we’re probably close to cycle high for yields.
If you want to long bonds as a tactical trade, the time may come soon.
But it’s not so straightforward to extrapolate from there to the bottom in equities.
In 2008 equities didn’t bottom until 1.5 years after the peak in rates.
How long it takes in 2022/2023 – I frankly have no clue. Nobody does.
You will need to monitor how the tail risks play out in the months ahead. Key would be the inflation outlook, and how the Fed responds.
As always though – will be sharing my views on Financial Horse every step of the way! So stay tuned!
As always, this article is written on 17 June 2022 and will not be updated going forward.
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