Tuesday, October 29, 2013

Using 300K to buy blue chips is a fool-proof dividend investment plan???

I was talking to a close friend who was a ex-insurance agent.

He told me a potential client told him that he would not buy any Investment Link Product, and that he would use his 300k to buy blue chips, and leave them for his son, the blue-chips like Singtel, Keppel, etc give good dividends. My friend is tongue struck, and agreed.

I told my friend, things are not that simple. Of course, I believe buying in blue chips is still better than buying a nonsensical ILP, but perhaps I will not say its a fool-proof, and if there is a good endowment policy with a decent guaranteed yield (almost non-existence in current market, I had 2 from asialife 6 years back, the guaranteed yield is about 3% ), you might not have to worry about loss of capital or bad timing when liquidation needs arises.

If you buy blue chips at the right price, you are good.

But splurging 300K on blue-chips sound very much like a show-off of wealth rather than a plan, If I were my friend, I would have asked the following:

1) Are you spending the 300K at one go?

2) How long are you holding to your blue-chips?

3) What blue chips actually are you thinking of?

Buying the blue chips now yield 3-5%, take the average of 4%, it is still better than the asialife plan.

But you will be exposed to

1) Market price fluctuation, if you buy at a low price, the plan is fool proof, but some blue chips are hardly doing well. Look at SIA, NOL, golden Agri.

2) During a bear market, price can come down by half, we are not in one now, so there is no margin of safety, but if the investment is purely for dividends, and there is no "maturity", you can ride through the high and lows, then there is no risk. Hence the first and second questions are important.

3) If you buy all the blue chips in the index, you are better off just buying the index, if you are selective, are you aware that Keppel is cyclical, it is doing very well now, and is expected to do well in the foreseeable future, but if oil price collapse due to cheaper alternatives coming online, or extraction of shale oil and gas become so much cheaper, what would happen then, even if price is stable, there could be oversupply. Is dividend the only thing you are looking at? If you bought at a inflated price, you can be sure the first few years of dividends are paying out from your own pockets.


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