We have come to an end for the second quarter of 2023. There will therefore be a need to reassess what I expect dividend yield should be as we move into 2023Q3. 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.
There is also a need to consider that the Federal Reserve on 22 June 2023 have hinted to continue hiking interest rates, after their last rate hike in 3 May 2023 have brough the interest rates to a range between 5.00% and 5.25%. There is a possibility that long-term interest rates may see an increase over the next few months, though it is not reflected in my assessment as the rates have shown to be relatively unchanged towards the end of June 2023. However, investors should take note and adjust their required rate of return to suit their risk appetite.
Website: US Fed official says more rate hikes necessary
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Singapore Savings Bond
Investors should plan ahead to look at the longer term yields. I would thus be using the Singapore Savings Bond yield below for my benchmark.
The Singapore Savings Bond (“SSB”) rates have seem to stabilized, with the July 2023 issue seeing a 10-year average return of 2.82%. 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 June 2023 rates from MAS e-service website and noted that the 10 year average yield is as below.
| June 2023 Date | 10-Year Yield |
|---|---|
| 1 | 2.89% |
| 5 | 2.93% |
| 6 | 2.90% |
| 7 | 2.91% |
| 8 | 2.98% |
| 9 | 2.98% |
| 12 | 3.02% |
| 13 | 2.97% |
| 14 | 3.01% |
| 15 | 3.03% |
| 16 | 3.00% |
| 19 | 3.02% |
| 20 | 3.02% |
| 21 | 2.97% |
| 22 | 2.99% |
| 23 | 3.00% |
| 26 | 2.97% |
| 27 | 3.03% |
| 28 | 3.03% |
| 30 | 3.08% |
| Average | 2.99% |
With that in mind, seems like the 10 year yield for the upcoming SSB August 2023 issue is looking to be around 2.99%. The interest rates have definitely stabilize around the 3.00% range and I can only presume is due to investors have already started 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 3.00% 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 expected dividend yield for new purchases to remain unchanged in 2023Q3 from 5.50% to 6.50%.
Whilst getting above 6.50% 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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