Happy New Year! With 2022 closed, I will be updating what I expect dividend yield should be as we move into 2023Q1. This is something that I will be updating on a quarterly basis as there is a need to consider the current trends. Especially now with the upcoming February 2023 Singapore Savings Bond average 10 year yield to be estimated at 2.97%.
Keep in mind though that my current assessment is my best estimation of what is going to happen over the next few months. It is possible for another black swan event to happen and cause wild fluctuations.
Singapore 6-Month Treasury Bill
To address one of the more popular safe assets, we look at the most recent 6-month treasury bill (“T-Bill”). Short-term interest rates in the last 6-month treasury bill issuance of the year, the cut-off yield was at 4.28% when auction closed on Wednesday, 21 December 2022.
Website: Latest Treasury bill yields 4.28% in Singapore’s last auction for 2022
The short-term interest rate is now higher than the long-term interest rate. This inverted yield curve can be a sign of a coming recession, and there may be bargain prices arising from both equities and bonds as investors look to sell their higher risk assets since the safe one is able to provide comparable yield.
For me however, I will not be using 6-month treasury bill as a gauge in my analysis. While it may be tempting to load onto short-term assets for higher interest rates, keep in mind that there is a reinvestment risk. The cash flows received from an investment in these short-term assets may not be able to be reinvested at a rate comparable to their current rate of return.
Investors should thus plan ahead to look at the longer term yields. I would thus be using the Singapore Savings Bond yield below for my benchmark.
Singapore Savings Bond
Contrary to the rising interest rate, the Singapore Savings Bond (“SSB”) rates have seem to stabilized, with the January 2023 issue seeing a 10-year average return of 3.26%. As the SSB is backed by the Singapore Government and has a credit rating of AAA, for now this is one of the safest investments out there.
I have extracted the daily December 2022 rates from MAS e-service website and noted that the 10 year average yield is as below.
With that in mind, seems like the 10 year yield for the upcoming SSB February 2023 issue is looking to be around 2.97%. The interest rates have definitely fallen off and I can only presume is due to investors are already starting to price better outlooks after the recession is cleared over the next few years. Therefore as a long term holder, it is safe to use the 2.97% as a risk free rate when making your purchase considerations.
Website: SGS Prices and Yields – Benchmark Issues
Summary
With my market risk premium of 2.50% and the risk free rate of approximately 3.00%, this would translate to a my new expected dividend yield for new purchases in 2023Q1 should range from 5.5% to 6.5%.
Whilst getting above 6.5% may seem like a good deal. There may be significant underlying risks for these assets which justified their higher yield. Investors should also not just look at dividend yield but also at the strength of the company, such as their management team, when making the investment decision.
Needless to say, as the economy remains uncertain and interest rates continue to fluctuate significantly, this may change within the next few months.
Disclaimer: Not financial advice. All data and information provided on this site is for informational purposes only.
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