With the Federal Reserve increasing interest rates by 75 points and indicating more hikes to come in the following months, investors are now running towards the high-yielding treasury bills and bonds which were almost non-existent 2 years ago. With the current 2-year and 5-year T-bills in the US yielding 4.2% and 3.98% respectively, it can be quite challenging to find an investment that can beat such a high risk-free rate.
The common risk-free rate in Singapore that is commonly referred to is the CPF Ordinary Account (OA) interest rate which is 2.5% or the Special Account (SA) which offers 4.0%. With all that is going on right now, are there better investments available that can potentially yield much higher and do not come with many risks? In this article, we’ll deep dive into 4 alternative investments you can look at in the Singapore market to beat the current risk-free rate we have.
1. Vanguard Long-Term Bond ETF (NYSE: BLV)
To kick start the list is Vanguard’s Long-Term Bond ETF (NYSE: BLV) which is not specifically based in the Singapore market but is easily accessible globally. So why did I pick this Bond ETF out of the many available in the market? First of all, the ETF is issued by Vanguard which is a very well known ETF issuer with many other ETFs under its well-established brand name. On top of that, Vanguard is well known for having low expense ratios for its ETFs, with this bond ETF only having an expense ratio of 0.04%.
Why are low expense ratios important? An ETF’s expense ratio indicates how much of your investment in a fund will be deducted annually as fees. A fund’s expense ratio is calculated using the fund’s operating expenses divided by the average assets of the fund. A good guiding principle is to not invest in any fund with an expense ratio higher than 1% because it will eat too much into your profits. Therefore, with an extremely low expense ratio of 0.04%, that will be the least of your worries.
So what assets do I have exposure to if I were to invest in BLV? As you can see from their top 15 holdings, BLV offers exposure to the long end of the maturity curve, with exposure to all types of bonds that have maturities greater than 10 years. BLV is heavy on both interest rate risk and credit risk, and as such will generally deliver a relatively high expected return. BLV can be a quality pick for investors seeking a one-stop shop for longer-term bond exposure that likely has a greater yield than a comparable pure T-Bill fund.
Last but not least, what is the current yield that you can get if you invested in BLV? At its last close of US$74.31, it is offering a very attractive yield of 6.18% based on an annual dividend rate of US$6.42/share. It is good to note that since it is a US-based ETF, if you are a non-US investor, you will need to pay a 30% withholding tax on your dividend gains. If you were to factor that into your dividend yield, you will be earning a net yield of 4.326% which is still an attractive yield and higher than the CPF OA and SA rates.
2. Development Bank of Singapore (SGX: D05)
Next on our list is the Development Bank of Singapore, better known as DBS (SGX: D05). Being one of the 3 big banks in Singapore, it definitely has a strong reputation across the country. So why DBS over UOB (SGX: U11) or OCBC (SGX: O38)? Let’s start with the quantitative part first.
| Year on Year Difference | Revenue | Profit Before Allowances | Allowances Made | Net Profit |
|---|---|---|---|---|
| DBS | S$14.297 billion (-2%) | S$7.828 billion (-7%) | S$52 million (-98%) | S$6.801 billion (+44%) |
| UOB | S$9.789 billion (+7%) | S$5.594 billion (+10%) | S$657 million (-58%) | S$4.075 billion (+40%) |
| OCBC | S$10.596 billion (+5%) | S$6.656 billion (+5%) | S$855 million (-28%) | S$4.858 billion (+35%) |
If we look back at the FY2021 results across the 3 banks, we can see that DBS has performed the best across the 3 banks, recording the highest growth in net profits as well as the largest reduction in allowances made year over year. On the flip side, based on their key financial ratios, OCBC was the best performing bank with the strongest balance sheet, second-highest NIM (1.54%), and efficient cost/income ratio (45%).
Another interesting thing to note is that with the continued hikes in interest rates, we need to look at the CASA ratio for all 3 banks. Just to recap, the CASA ratio stands for the “current and savings account” ratio. The CASA ratio of a bank is the ratio of deposits in current and saving accounts to total deposits. A higher CASA ratio indicates a lower cost of funds because banks usually give a much lower interest rate on current and savings accounts. Indirectly, a higher CASA ratio will translate to a higher net interest margin as well for banks. At the end of Q2 FY2022, DBS had the highest CASA ratio of 72%, with OCBC leading behind at 61% and UOB at 54.7%
Read Also: Are Our Local Banks Still Overvalued? How Did DBS, UOB, and OCBC Perform In FY2021?
On the quantitiative part, it does look like DBS is ahead of its peers but let’s not forget the qualitative part of this analysis and comparison. With 2 new digital banks joining the scene, namely GXS Bank and Trust Bank, the 3 local banks will now have increased competition. Despite this, DBS mentioned that it will announce a review of its dividend policy towards the end of FY2022 with a view to hiking its dividends for FY2023. This shows that the management must be confident in the company’s abilities to continue growing revenues even with increased competition in the local market.
At its last close of S$33.40, DBS is offering an attractive yield of 4.31% based on an annual dividend rate of S$1.44/share. With the possibility of an increase in dividends in FY2023, DBS could be yielding much higher in the future if investors were to invest now.
3. Keppel DC REIT (SGX: AJBU)
3rd on our list is Keppel DC REIT (SGX: AJBU), Singapore’s first pure Data Centre REIT but not the only one with the recent addition of Digital Core REIT. This is arguably Singapore’s most defensive yet fastest growing REIT, with Parkway Life REIT coming in for a close second place. So why KDC over the many other REITs available in the Singapore market?
KDC has made a couple of acquisitions and investments which were transacted towards the 2H of FY2021. As such, most of them were not able to meaningfully contribute to KDC’s revenue numbers. Coming into FY2022, other than the acquisition made in the UK, the other acquisitions and investments will be properly reflected in KDC’s revenue numbers.
On top of that, thanks to its well-established sponsor, they have plenty of opportunities to grow through potential pipeline assets. It is mentioned in their result release that KDC has over S$2b in terms of potential assets for acquisition through Keppel T&T and Keppel’s private data centre funds. It is also good to note that Keppel T&T has granted KDC the Rights of First Refusal (ROFR) for future acquisition opportunities to its data centre assets. Having a strong sponsor, on top of a huge ROFR pipeline, will help KDC secure a stable path for growth in FY2022 as they continue to expand their portfolio. Not to mention with their relatively low leverage and high debt headroom, KDC will likely continue to acquire more in FY2022.
If you are interested in Keppel DC REIT, you can check out my in-depth analysis here.
At its last close of S$1.85, KDC is offering a competitive yield of 5.46% based on an annual dividend rate of S$0.10098/share. With so many potential growth catalysts lined up for KDC, investors can definitely expect a “pay-raise” when investing in KDC.
4. Sheng Siong (SGX: OV8)
Last but not least on the list is Sheng Siong (SGX: OV8), a very well-known household brand in Singapore, specializing in the Consumer Staples sector. Sheng Siong is a very defensive and “boring” company as it is non-cyclical in nature. Despite this, the company has done remarkably over the past 2 years thanks to the pandemic situation. With its recent earnings just being released, how well did Sheng Siong fare in Q2 FY2022?
First off, its revenue fell slightly by 0.7% year over year due to the slow down in demand in Q2 as it was the holiday period in Singapore. Despite this, its gross profit margin, as well as net profit margin, grew by 1.2% and 0.3% respectively year over year. On top of all this, the company actually announced an increase in its interim dividend to S$0.0315/share as compared to last year’s S$0.031, marking a 1.61% increase year over year.
Coupled with the rise in inflation and interest rates, Sheng Siong should do exceptionally well as compared to other Consumer Staple brands as the company has positioned itself to be more affordable and “budget-friendly”, being primarily located around HDBs as compared to being located in shopping malls.
At its last close of S$1.59, Sheng Siong is offering a yield of 3.87% based on its trailing 12-month dividend of S$0.0615. Despite Sheng Siong offering the lowest yield as compared to all the other investments I mentioned in this article, the company is definitely a lot more defensive in nature. If the company continues to do well, we might see an increase in its final dividend in FY2022, which could ultimately lead to an increase in the dividend yield.
Final Thoughts
I strongly disagree with the belief that as you seek bigger rewards, you must take on bigger risks as well. With this article, you can definitely see that it is not that hard to find alternate investments that can potentially yield you much higher returns than the current risk-free rates available. On top of that, you do not need to take on significantly higher risks for these higher returns as well.
- DBS and Sheng Siong are solid companies that have been around in Singapore for a very long time now
- Keppel DC REIT is a very stable REIT with a strong sponsor backing it
- BLV is managed and backed by one of the largest ETF issuers globally
As interest rates continue increasing, it will become harder to find such alternate investments and as such, investors must understand the risk to reward they are taking on if they choose to find such alternate investments. Failure to do so might result in picking a bad apple and losing your investment if the company does badly.