Coping With The 32% Decline In Dividends

As a dividend investor, I have been slowly accumulating shares in REITs and dividend shares to grow the annual dividend income since late 2017.  I am blessed and contented with the performance thus far, as the total dividends received annually continues to grow, despite hiccups along the way.  First major hiccup along the way is in 2020, where the strike of the pandemic and the circuit breaker hit businesses and some REITs in a huge way, resulting in cuts in dividends.  The second major hiccup recently will be in 2022 where the FED suddenly hike interest rates at rocket speed, and that created financial stress on REITs, which inevitably resulted in the drop in distributions by most REITs to varying degree.  Thankfully, with the slight diversification into other dividend-paying shares, they helped to mitigate the decline, and allowed my portfolio to experience dividend growth year-on-year.

This year, on 23rd February 2024, Hong Leong Finance (HLF) reported their earnings for 2H2023 and FY2023.

"The Group recorded a net profit of $46.8 million for the second half 2023, net interest margin was lower at 1.4% compared to the corresponding prior period, bringing net interest income down by 30.9% to $100.7 million.  Fee and commission income decreased by 32.8% to $5.5 million for second half 2023 from lending business due to subdued property financing activities in the financial market.  Other operating expenses reduced by 6.4% to $8.6 million, attributed to well-controlled business transaction and marketing expenses.  Net allowances for loans and other financial assets for second half 2023 was a net reversal at $1.9 million arising from lower allowance for non credit-impaired loans compared to same period last year.  The non-performing loan ratio is well managed at 0.5%."

The decline in net profit meant that there is a corresponding decline in the dividends payout.  For 2H 2023, the dividends per unit dropped by 32% year-on-year, while for FY 2023, the dividends per unit dropped by 27% year-on-year.  This is somewhat a bombshell to my dividend strategy as HLF pays out dividends semi-annually, and dividends tend to be lumpy.  As such, a 32% decline in the final dividend for FY 2023 is a significant decline in absolute amount terms.  This is 'worsen' by the fact that HLF is the 5th largest share in my portfolio by market value, behind Singapore Technologies Engineering (STE), Oversea-Chinese Banking Corporation (OCBC), Mapletree Industrial Trust (MIT) and ParkwayLife REIT (PWLR).  

This decline will impact the total dividends I can collect in the 2nd quarter of this year, and hence impact the dividend growth of the portfolio.  Thankfully, the decline in absolute amount is mitigated by the slight growth in dividends by OCBC.  Nonetheless this further acknowledges the inadequacy of the strategy to collect dividends as passive income during Barista FIRE or FIRE.  To deal with this, I am exploring two methods, one to be executed as soon as possible, and one will be done when I am ready for Barista FIRE execution for myself.

For the first method, I am intending to 'fine-tune and smoothen out' the dividend income process by minimizing the weightage of the dividends derived from each company (just like how REITs will perform favourably by having a diversified tenant base such that top 10 tenants do not contribute to a huge percentage of rental income).  To do that, I will need to include more shares into my portfolio, and I think it is time for me to make the move to slowly include the 2 other powerhouse of the Straits Time Index, namely Development Bank of Singapore (DBS) and United Overseas Bank (UOB) into my portfolio.  Their inclusion will help to lower the weightage of dividends payout from other companies in my SG Dividend Portfolio.  I did not include them into my portfolio all these while because their high share price means I need a larger sum of money to buy just 100 shares (I know I am incurring higher trading fees, but for local shares, I still prefer to buy them via Lim and Tan Securities, and accumulate my shares in the Central Depository Pte Ltd instead of storing them with low cost brokerages.  I only buy and store my US shares with IBKR).  That is a little tough for me in terms of execution, based on the cashflow I had.  However, I think it is time for me to include them as I rebalance my portfolio, and as my dividends collected grow, I can now reinvest my dividends collected from other shares into these banks once every quarter.  Currently, it may be a bad time for me to include the banks as the foreseeable near term future tends to a higher probability of interest rate cut, which may impact the profitability of banks.  Nonetheless, every sectors have their cycles, and in the long term, I believe I will thank myself making this move now.

The second method will materialize later when I am almost ready to execute Barista FIRE.  It may not seem like a smart move, but I think it can help to cushion the volatility of the markets, and that is to accumulate and save prior 2 years' worth of dividends in a high savings account or fixed deposit.  For instance, if I decide to begin my FIRE journey in 2030, I will have to stop reinvesting dividends by 2028 and instead channel the dividends into a fixed deposit or high-interest savings account.  The total dividends collected in 2028 and 2029 will be accumulated, and ready for use in 2030.  I decided to manage the funds this way as this can make the cash flow more predictable.  

For illustration:

Expected annual expenses in 2030: SGD 30K

Total dividends collected in 2028 and 2029: SGD 36K + SGD 38K = SGD 74K

Due to market downturn, dividends collected in 2030 was lower by 35%: SGD 24.5K

Total dividends available at end of 2030: SGD 68.5K

With this sum made known, I will have the flexibility to pre-empt what can be done the following year, with the current market situation made known to myself.  For Barista FIRE-ers like myself in the near future, I can try to find means to increase their part-time income in 2031, or maintain their expected expenses in 2031 at SGD 30K (instead of increasing expenses according to inflation at about 3% to SGD 31K).  Similarly, for FIRE-ers, they can also maintain or even lower their expected expenses in 2031 to SGD 28K if market downturn is expected to persist for longer durations.  I think 2 years dividend buffer should be sufficient to ensure income visibility during FIRE. 

I propose these methods for myself as dividend income tend to be lumpy, and these methods can help to smoothen the expected cashflow annually.  I do not encourage the use of emergency funds to fill in the gaps and complement any decline in dividend income, as emergency fund is only intended to be used during emergencies.  Imagine a very bad year where market is depressed and hence dividend income is cut, and some medical emergencies arises during the same period, having the whole emergency fund available for deployment during such times will make matters less stressful.

Although the decline in dividends is painful for dividend investors, I will continue to fine-tune my portfolio so that when similar events happen in future, the decline will not be detrimental to my cashflow.  At the same time, I will scrutinize the companies in my portfolio so that their fundamentals remain strong.  With regards to HLF, I will not sell any shares, as it is still giving me around 6% yield on cost basis, and allow me to treat it as a bond component in my portfolio.  Fellow blogger Blade Knight of Investment Income for Life had written a post on HLF, expressing his disappointment in HLF and thus has decided to sell off all his positions in HLF.  I understand his frustration with the underperformance of HLF, and I respect his decision to sell.  However personally, I will continue to hold on to my shares.  Moving forward, I may reinvest the dividends from HLF to the new entrants to my portfolio, either DBS or UOB.  Hopefully my portfolio will be stronger moving forward.  Barista FIRE, here I come...!