It’s been quite a while since we talked about dividend stocks on Financial Horse.
So that’s exactly what I wanted to do today.
Top 3 Dividend Stocks that I would consider buying in 2023 (as a Singapore Investor).
With a minimum dividend of 5.0%.
Just to be clear – Nobody is saying to buy these stocks tomorrow… Macro risk is very elevated
Just to be absolutely clear.
Just because a dividend stock is on this list – doesn’t mean that I’m saying to go out and buy it tomorrow.
I’ve shared my macro views in other posts.
The long and short is that I think there is a good chance of a recession in the next 12 – 18 months.
And how dividend stocks perform in a recession, let’s just say not terribly well.
So view this more as a list of dividend stocks to keep on your watchlist.
To be bought at the right price over the next 12 – 18 months.
Top 3 Dividend Stocks to buy in 2023 – Minimum dividend yield of 5.0% (as a Singapore Investor in 2023)
Annualised Dividend Yield – 5.2% (using 42 cents ordinary dividend annualised, excluding special dividend).
Price / Book: 1.47x
DBS Bank needs no introduction.
Singapore’s largest and most ubiquitous bank.
In Q4 2022 DBS just raised their quarterly dividend to 42 cents.
Annualised – that works out to a mind blowing 5.2% dividend yield.
Yes that’s exactly right, DBS Bank pays a higher dividend yield than a DBS savings account or T-Bills.
Risks with this Dividend Stock
I know that almost every Singaporean investor loves DBS Bank, so I’m not going to spend too much time talking about the pros – You guys already know them by heart by now.
Rather, I’m going to talk about the risks:
- Will the US banking problem get worse?
- Is DBS’s price too high given the possibility of a 2023/2024 recession?
Will the US banking problem get worse?
It’s fairly clear by now that the immediate fallout of the US bank failures has been contained.
But that doesn’t mean the problem has disappeared.
No… the problem has merely evolved.
The problem for the US banking system is not a bank run (which policy makers have already addressed with emergency liquidity) but rather that the repricing of deposits will put material pressure on bank profits and thus their ability and desire to make loans and buy bonds.
The aggregate hit to banks will range from modest to extreme depending on how fast deposits reprice, with many banks seeing significant profit declines and a portion of the system facing insolvency or zombification.
Basically – the immediate risk of bank runs has been solved via Fed emergency actions.
But the deeper underlying problem remains.
Banks have gotten complacent and come to rely on a decade of easy money, with a flood of deposits that they paid 0% interest rates on.
Well, now that market interest rates are at 4%+, depositors are taking out all that money.
Which means banks lose a key funding source (cheap deposits), which they need to replace with funding at market interest rates.
All while their loans are made at 2021 levels of low interest rates.
In plain English – your input costs go up, while your output price stays the same.
And that hits profitability.
So the next stage of this “banking crisis” will evolve into a profitability one, which is not over by any means.
More US banks may fail before this cycle is over.
I get that many of you will say that DBS as a Singapore bank does not face the same problems as US regional banks.
To be fair, I do agree with this to a certain extent.
But as the US economy weakens and more US banks fail, I don’t expect DBS to be completely immune either.
Is DBS’s price too high given the possibility of a 2023/2024 recession?
Which brings me to my next point.
Here’s the 20 year chart of DBS’s Price to book.
Banks are about as cyclical as it gets.
Average Price/Book is 1.3x.
Generally speaking – if you buy DBS Bank at 1 Standard Deviation below average P/B (1.0x).
And sell it at 1 Standard Deviation above average P/B (1.5x).
You generally do quite well.
Sure it doesn’t work perfectly and in some cases like 2007 it can go as high as 1.7x book value, but you get my point.
Is this Dividend Stock at cycle highs?
So with DBS already at 2018 cycle high valuations.
And with the risks for the global economy (and interest rates) towards the downside in the next 12 – 18 months.
Do you think the next 30% move in DBS’s share price is up or down?
Annualised Dividend Yield: 4.77% (including special dividend), 3.2% excluding special dividend
Price / Book: 1.24x
Full disclosure that I was a long time CapitaLand Limited shareholder.
After the restructuring into CapitaLand Investment and the share price jumped to $3.5-3.7ish, I dumped the entirety of my stake in 2022:
But let me just put it out there that I’ve been very impressed by what current CEO Chee Koon has done with CapitaLand since taking over.
Real Estate developers tend to be boring, unsexy businesses – a value trap.
But Chee Koon – through a series of restructurings has managed to unlock a lot of value for shareholders and turned it into quite an exciting company.
From the merger with Ascendas, to the privatisation of the CapitaLand Development arm – this horse is truly impressed.
Market seems to think this way too, as CapitaLand Investment has consistently traded above book value since listing.
I’ve been impressed to the point where if I get an attractive entry point in the next cycle, I could see myself buying back a position.
What is the Dividend Yield?
If you include the special dividend, CapitaLand trades at a 4.77% dividend yield.
It drops to 3.2% if you exclude the special dividend though.
Risks with this Dividend Stock
As with DBS, let’s talk about the risks with CapitaLand:
- Incoming global real estate weakness
- Big China Real Estate Exposure
Incoming global real estate weakness
I’ve shared that I see global Commercial Real Estate (CRE) as one of the ground zeros of the coming crisis.
To me – CRE is one of those areas that levered up significantly the past decade, with valuations priced on the assumption that interest rates would stay at 0%.
Now that interest rates have gone higher, this is going to trigger a lot of pain.
Real estate cycles are as old as time itself, and there are only 2 ways this can play out:
- A sharp repricing (down)
- A prolonged period of pain
For now, I don’t necessarily see (1) playing out.
I see this crisis as quite different from 2008 because the banks are much sounder this cycle.
Rather, I think (2) is more likely to play out.
Some analysts out there are predicting a 40% peak to trough decline for US real estate prices (coincidentally the same number used in the Fed stress test).
If true, a lot more pain for real estate lies ahead.
The benefit of CapitaLand Investment over a REIT is that CapitaLand has a fee income business from real estate management.
Which technically speaking, should allow it to outperform REITs in a higher interest rate climate.
Big China (and Western) real estate exposure
But I say *should*, because you should also note that CapitaLand has huge exposure to China real estate.
In fact almost 32% of its asset base is China real estate.
That’s even bigger than its Singapore real estate (29%).
I know many investors are not comfortable with China exposure, and think that China real estate is a big black hole.
I mean I don’t disagree with that view.
But at this point in the cycle – are you more worried about China real estate, or US/European real estate?
Funnily enough I might actually be more concerned with the latter.
And CapitaLand has almost 19% exposure to non-Asian real estate as well.
Sometimes that’s the problem with being too diversified.
As long as any part suffers, you suffer.
Price: $4.19 HKD
Annualised Dividend Yield: 8.1%
Price / Book: 0.5x
For the record, I know that CapitaLand’s dividend is only 4.77% and below the 5.0% dividend rule I set for this article.
So I decided to make up for it in the third name.
With a mind blowing 8.1% dividend yield – it is a China bank ICBC.
Here’s the ICBC long term chart, and frankly it doesn’t need to be ICBC, any of the Big 4 China banks work for this (BOC, CCB, ABC).
The thesis for ICBC is simple.
Don’t ask too many questions about what’s on ICBC’s books, because you won’t like the answer (nor will you get a straight answer frankly).
Don’t expect ICBC to be run like a JP Morgan, because this is China and the banks are an extension of the state (furthering state goals).
But you do get implicit support from the CCP, and you get to collect your 8.1% dividend each year.
Is that a deal you would take?
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Risks of this Dividend Stock
Risks – where do I even begin.
Remember how I talked about not asking too many questions about the loan book.
Here’s the 20 year Price/Book chart.
It is a Log Chart, so you can see how it’s gone from 5.0x book value post-listing to 0.5x book value today.
Most of these loans are real estate loans, that will probably never be able to be repaid.
So the 0.5x book value is masking a lot of these bad loans.
And that’s even before we talk about Xi Jinping and his plans for China.
Or geopolitical risk with the US.
A Taiwan war is not my base case this decade, but it’s also not something I can say is absolutely impossible.
If a Taiwan war plays out, what do you think happens to ICBC’s share price?
If ICBC gets cut off from SWIFT and the US banking network, can it survive?
So ICBC is not without risks, but that’s also why you can pick it up at a 8.1% dividend yield.
I leave it up to each investor to form their own views.
Whatever you decide, I would say that position sizing is important.
In this new era of geopolitical risk, you don’t want to be overexposed to any one country (including China).
Very Honourable Mention: Energy – Shell, Exxon Mobil
I actually really, really wanted to include an energy stock on this list.
But I couldn’t because all the big Oil majors have very inflated share prices, which means a low dividend yield:
- Exxon – 3.10% dividend yield
- Shell – 3.55% dividend yield
- Conoco Phillips – 5.00% dividend yield
Don’t forget the US listed shares will have a 30% dividend withholding tax.
Factor that in and energy looks like more of a capital gains play than a dividend play.
Sure you can get CNOOC which pays a 15% dividend (or China oil plays), but that brings in all the China related risks we talked about above.
So for that reason I left energy out of this list.
But let me just say that I see energy as forming a key part of my portfolio this decade, as I think we will enter a decade of higher structural inflation.
But… do we get a recession first?
That said, the short term 12 – 18 month outlook for energy is very, very murky.
Here’s Brent Crude, you can see how it’s dropped sharply from post-Ukraine war highs of 120.
Here’s Brent Crude overlayed with XLE (energy stocks ETF).
It’s a chart crime I know.
And yes I know that this only looks at oil prices for immediate delivery, not those 2 – 3 years out.
But the point is clear.
Over the past 12 months, front end oil prices have dropped sharply.
While energy stock prices have kept powering higher.
With commodities you need to understand that a small supply-demand imbalance can have a drastic impact on prices.
Just look at what happened in 2015 and 2020 (with negative oil prices).
If we do get a recession, that will take out a fair bit of oil demand – then the question is whether OPEC will cut supply to match.
Here’s oil in 2008:
Oil went as high as $150 in the days leading up to the financial crisis.
And then absolutely cratered to $40.
There’s a reason why all the hedge funds are shorting oil these days.
Long story short – it’s not so straightforward with oil in the short term, so I would be more cautious.
I do see myself adding to oil (and probably most of the names above) in the next 12 – 18 months though.
Patreons will get access to my latest macro views and my buy/sell timings.
Closing Thoughts: Top 3 Dividend Stocks to buy in 2023 – Minimum dividend yield of 5.0% (as a Singapore Investor in 2023)
I wanted to leave you with this chart below.
Every decade has a theme.
In the 60s it was the Nifty Fifty (Disney, IBM etc).
In the 70s it was Gold.
In the 80s it was Japan’s Nikkei.
In the 90s it was NASDAQ with the Dot Com bubble.
In the 00s it was oil.
In the 10s it was FAANG.
But the lesson here – is that last decade’s winners never last forever.
They have a good run, and then the run ends there.
How will FAANG perform in a period of higher structural inflation and higher interest rates?
What will this decade’s investment theme be?
This article is written on 14 April 2023 and will not be updated going forward.
If you are keen, my full REIT and stock watchlist (with price targets) is available on Patreon, together with weekly premium macro updates like this one. You can access my full personal portfolio to check out how I am positioned as well.
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