Wouldn’t it be nice to have some extra cash each month on top of your monthly income? And no, I’m not referring to the pitiful 0.05% interest that banks give you on traditional savings accounts.
I am referring to a dividend/interest-paying portfolio that provides you with extra cash ranging from a couple of dollars, to hundreds if not thousands of dollars per month. And the best part? Pretty much anyone with a regular monthly income can start building this portfolio!
In this article, I will be detailing a tiered approach, based on your risk appetite, that you can use to start building your very own dividend/interest-paying portfolio or what I like to call a ‘passive money generator‘.
Tier 1: The capital-guaranteed options
The very first tier would consist of capital-guaranteed products, either insured under the SDIC or guaranteed and backed by the Singapore government.
This would include products like:
- High-interest savings accounts
- Singapore Savings Bonds
- Treasury Bills
- Fixed deposits
- Short-term endowment plans
- Singapore government bonds
High-interest Savings Accounts
- Pros: Funds are highly liquid, fuss-free way to earn higher interest
- Cons: Certain conditions may be required to earn higher interest, interest returns can be readily amended
- Interest payment: Monthly or daily
As the term suggests, high-interest savings accounts give…higher interest (duh) on your money as compared to traditional savings accounts. Such accounts can either have certain conditions or none at all to earn the higher interest. In most cases, accounts with conditions usually give you higher returns on your money.
Some popular high-interest savings accounts with conditions are the UOB One account or the OCBC 360 account. Of course, these are not the only two options in the market. If you want to compare the returns on various accounts, just do a quick search on ‘the best savings accounts in Singapore‘. You should easily find some comparisons on local personal finance websites.
One thing you would want to keep an eye out for when comparing high-interest savings accounts with conditions is their Effective Interest Rate (EIR). As some of these accounts have different interest rates for different cash thresholds, the EIR is basically the blended or ‘actual’ interest rate you get on your cash.
For instance, in the case of the OCBC 360 account, the EIR for $100K of funds for fulfilling the salary credit condition is 2.5% (0.75 x 2% + 0.25 x 4%).
For individuals who have difficulties in hitting the requirements to earn higher interest, you may want to look at accounts with no conditions instead. Two popular options in the market are the Mari Savings Account and GXS Savings Account.
Another interesting point about these accounts is that some pay out interest daily. This could be useful for individuals who constantly move their funds in and out of their accounts.
A no-frills high-interest savings account can also be an option for individuals who have ‘maxed’ out their cash in conditional savings accounts. After all, any funds past the final cash threshold would earn a paltry 0.05% interest.
Singapore Savings Bonds
- Pros: New bond tranche every month, able to lock in interest return for 10 years, liquid investment
- Cons: Delayed receipt of funds when liquidated, $200K limit
- Interest payment: Every 6 months from issue date
Besides high-interest savings accounts, another product that offers interest on your funds would be the Singapore Savings Bond (SSB).
Issued by the Monetary Authority of Singapore (MAS) and backed by the Singapore government, SSBs are essentially bonds with a maturity period of 10 years. However, what makes them significantly different from traditional bonds is that SSBs can be readily liquidated at any time.
Do note that early liquidation of SSB is subjected to a $2 withdrawal fee and you would only receive your invested capital back on the 2nd business day of the following month. There is also a $200K limit per investor on the total amount invested into SSBs, regardless of the tranche.
In addition to being rather liquid, new SSBs are also issued monthly, which gives investors flexibility when navigating interest rate environments. Investors can choose to liquidate lower-yielding SSBs in exchange for high-yielding SSBs in high-interest-rate environments or hold on to high-yielding SSBs during periods of low interest rates.
Treasury Bills
- Pros: Short lock-in period, flexibility to set a minimum accepted yield
- Cons: Illiquid, liquidation can only be done at 3 banks
- Interest payment: Nil
Another product issued by the MAS and backed by the Singapore government is treasury bills (T-bills). These short-term investments are issued out with either a 6-month or 1-year maturity period.
Unlike the SSB, there is no interest paid out for T-bills. Instead, they are issued at a discounted rate based on their cut-off yield. For instance, if the cut-off yield is 3.8%, investors would pay only 96.2% of the value of the T-bill. Upon the T-bill maturity, investors would receive 100% of the T-bill value.
T-bills also cannot be readily liquidated like SSBs and can only be sold back over the counter at the 3 local banks (DBS, UOB and OCBC). Thus, when investors subscribe to T-bills, they more or less have to hold them till maturity.
A unique feature of T-bills is that it allows investors to input a minimum acceptable yield during the auction process. For example, if an individual only wants to be assigned T-bills with a 3.7% yield, they can put in a competitive bid. If the final cut-off yield is below 3.7%, they would not be assigned any T-bills and would only be assigned if the cut-off yield is 3.7% or higher. This could be useful for investors who are more particular about the yields on their investments.
Fixed Deposits
- Pros: Locked-in interest returns over a specific tenure
- Cons: Rather illiquid, high-interest returns may only apply to certain cash amounts or tenures
- Interest payment: At the end of the tenure upon maturity
Besides just SSBs and T-bills, fixed deposits from banks also allow you to lock in a specific rate over a period of time.
While fixed deposits were unattractive in the past due to their low returns, the interest rate environment since 2022 has resulted in a significant increase in returns on such products. A quick check on the latest fixed deposit rates (as of July 2024) on the DBS website shows a return of 3.2% for a 12-month tenure.
Unlike T-Bills, fixed deposits are slightly more liquid. However, if you were to withdraw your funds before maturity, expect to receive a prorated return and there might also be additional withdrawal fees charged.
It is also useful to know that only SGD-denominated fixed deposits are insured under the SDIC. This means that funds in foreign currency fixed deposits are not covered under the $100K deposit insurance scheme.
Also, the $100K SDIC coverage is for the total aggregated funds per deposit insurance (DI) member. This means that it includes the sum of funds from both savings accounts and fixed deposits. So if you want to play it safe, do not put more than $100K with each bank or financial institution.
Short-term Endowment Plans
- Pros: Locked-in interest returns over a specific tenure
- Cons: Illiquid, a minimum sum might be required
- Interest payment: At the end of the tenure upon maturity
Like T-bills and fixed deposits, short-term endowment plans are another way for you to lock in a specified return over a period of time. Most short-term endowment plans in the market currently have a 3-year term based on a single upfront premium. This longer-term period can be a double-edged sword for an investor.
Should interest rates drop, a short-term endowment would be beneficial as a higher return was locked in. On the flip side, an investor would be stuck with receiving possibly lower-than-market interest returns should interest rates rise.
While short-term endowment plans have an added death benefit as compared to fixed deposits, I do not think it is a deciding factor as the death benefit is often minuscule (around 101% of the premium paid).
Singapore Government Bonds
- Pros: Locked-in interest over a long period, can be sold on secondary market
- Cons: Low trading volumes, longer maturity periods, bond prices may fluctuate based on market conditions
- Interest payment: Every 6 months from issue date
The last investment product to round up the capital-guaranteed tier would be Singapore Government bonds (SGS bonds). These bonds are fully backed by the Singapore Government which means you get back 100% of your funds upon maturity, on top of any interest earned.
The duration of SGS bonds can range from anywhere between 2 years to 50 years.
As compared to the other options mentioned earlier, SGS bonds can be sold on the Singapore stock market. However, the trading volume on such instruments isn’t great, which means it might take a while for such bonds to be sold.
Market prices of these bonds would also fluctuate slightly based on the interest rate environment, though you would always get back 100% of your initial invested capital upon maturity (provided the Singapore government doesn’t default).
Tier 2: Money market funds
- Pros: Daily returns, fast and easy withdrawal, no commitment period
- Cons: Returns will fluctuate based on interest rate environment, potential capital losses
- Interest payment: Typically daily
Starting from tier 2, all highlighted investment options henceforth are no longer capital-guaranteed.
At its core, money market funds are short-term bond funds. Most money market funds invest in a mixture of corporate and government bonds that mature within a year. Given the short duration of such bonds, the returns from money market funds are hence closely dependent on the interest rate environment.
A great feature of most money market funds is that you can often withdraw your funds instantaneously or at most within one business day. Coupled with the benefit of daily returns, this gives you great flexibility in getting the best possible return on your funds from various money market funds.
Currently, popular money market funds are Chocolate Finance, Mari Invest and Moomoo Cash Plus. They offer some of the highest returns in the market as of July 2024.
If you are interested, you can check out my article on Chocolate Finance, which currently offers the highest return of 4.2% till 31st December 2024.
Tier 3: Dividend/Interest ETFs
- Pros: Potentially higher returns from both capital gains and dividends, can be readily sold
- Cons: Slightly more research needed, volatile market prices, potential capital losses
- Dividend/interest payment: Quarterly or semi-annually
As compared to money market funds and capital-guaranteed options, dividend/interest-paying exchange-traded funds (ETFs) are a significant step up in risk and research required. However, this extra risk and ‘homework’ also comes with the potential of getting higher returns on your money.
When it comes to ETFs, you have a choice of investing in an active or passive ETF. The main difference is that active ETFs track a portfolio of selectively picked counters (by fund managers) while passive ETFs track market indexes. Thus, the management fees for active ETFs are typically higher than that of passive ETFs.
Personally, I would opt for passive ETFs as management fees can really eat into the returns on your invested funds, be it from capital gains or dividends/interest paid out.
While different ETFs track different asset classes, be it bonds, stocks or REITs, they all seek to replicate the returns of their respective underlying holdings.
Below are some non-exhaustive popular dividend/interest ETFs on the Singapore market:
- Bond ETFs: Nikko AM investment grade corporate bond ETF (ticker: MBH), IShares J.P. Morgan Asia credit bond ETF (ticker: QL2/N6M)
- Stock ETFs: SPDR Straits Times Index ETF (ticker: ES3), Nikko AM Singapore Straits Times Index ETF (ticker: G3B)
- REIT ETFs: CSOP iEdge S-REIT ETF (ticker: SRT), Lion-Phillip S-REIT ETF (ticker: CLR), Nikko AM STC asia REIT ETF (ticker: CFA)
Regardless of the ETFs you invest in, always make sure to do your research on their underlying holdings and the associated fees/charges involved. It’s also good to look at the ETF’s past performance to get a rough gauge of its potential returns.
Tier 4: Individual corporate bonds, REITs & stocks
- Pros: Highest potential returns out of all the tiers, stocks and REITs can be readily sold
- Cons: Requires the most research, volatile market prices, highest potential of capital losses
- Dividend/interest payment: Quarterly or semi-annually
And we have come to the final tier of a dividend portfolio or what I would like to call the holy grail of dividend investing. And that is to invest your money into individual corporate bonds, stocks and REITs.
This tier offers the highest return on your money. However, like everything in the investing world, higher returns equate to higher risk, especially if you do not know what you are doing.
Thus, to help you along, I will be listing out the bare minimum work you should do before investing in either corporate bonds, dividend stocks or REITs.
Corporate bonds
Before investing in corporate bonds, your main goal should be finding out if the bond issuer has the financial ability to sustain the coupon payment and redeem the bond upon maturity. This constitutes looking into the issuer’s balance sheet, cash flow statement and overall credit rating of the bond.
If the bond is perpetual (ie. no specified maturity date), you would also need to additionally consider the conditions in which the bond can be called back.
If the bond issuer is not publicly listed, look into the bond IPO prospectus for more details about the bond.
Personally, I would only invest in bonds during their IPO stage and not purchase them from the secondary market. This is because purchasing bonds from the market means that you might not get the specified yield as the market price of the bond could be higher than its par value (the price it was issued at).
Dividend stocks
For dividend stocks, you would need to consider both the financial health and performance of the company. Doing so allows you to see if the dividends paid out are sustainable and whether there is room for dividends to increase in the future.
This means that you would need to analyze both the company’s financial statements and its future growth prospects. The last thing you want is to invest in a company that is relying on debt to sustain its dividends paid out as it would likely result in dividends being suspended or reduced in the future.
Looking into a company’s dividend history could also be useful as it shows you the company’s track record. However, this should never be considered in isolation from the company’s financial results.
REITs
Analyzing REITs for dividends is roughly similar to that of stocks. However, there might be different terms used and there is also a need to consider potential dilutive actions.
For more information on how to analyze REITs, you can check out my guide over here.
Also when investing in either dividend stocks or REITs, your entry price is really important as it could significantly affect your overall returns. Thus, you might want to only buy into such assets when the dividend yield is both attractive to you and presents an adequate risk premium over the risk free rate (ie. the yields on your capital-guaranteed options).
As you can see, investing in individual bonds, stocks and REITs is not just simply picking and choosing based on the reputation or your perception of a company. Real research needs to be done to ensure that your dividends/interest received are sustainable and have the potential to increase in the future.
Conclusion
And there you have it, a complete tier guide to building your very own dividend/interest-paying portfolio!
Be mindful that when you are just starting out, your initial returns will not be much. Nevertheless, as long as you remain consistent and continue building up your capital coupled with adequate risk management, your dividends/interest per month will increase over time.
Also, you do not need to advance into all 4 tiers right away. Do it at your own sustainable pace while ensuring that your returns are above the inflation rate. After all, investing is a marathon and it’s all about consistency in the long run.