Happy New Year! We are coming to an end of the final quarter of 2023. There have definitely been a lot of changes relating to interest rates and therefore there is a need to reassess what I expect dividend yield should be as we move into 2024Q1. Keep in mind though that my current assessment is my best estimation of what is going to happen over the next few months. It may be different depending on the current market and economic situations.
There is a need to consider that the Federal Reserve on 13 December 2023 held its key interest rate steady for the third straight time and set the table for multiple cuts to come in 2024 and beyond. The interest rates are therefore maintained at a range between 5.25% and 5.50%, which was increased on 26 July 2023, the highest level in 22 years. There is a possibility that long-term interest rates may see further decreases over the next few months, and it is reflected in my assessment as the rates have shown to be decreasing towards the end of December 2023. Investors should take note and adjust their required rate of return to suit their risk appetite.
Website: Fed holds rates steady, indicates three cuts coming in 2024
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Singapore Savings Bond
Investors should plan ahead to look at the longer-term yields. I am using the Singapore Savings Bond yield below for my benchmark.
The Singapore Savings Bond (“SSB”) rates are on an uptrend, with the January 2024 issue seeing a 10-year average return of 3.07%. 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.
Website: SBJAN24 GX24010F Bond Details
I have extracted the daily December 2023 rates from MAS e-service website and noted that the 10-year average yield is as below.
| December 2023 Date | 10-Year Yield |
|---|---|
| 1 | 2.99% |
| 4 | 2.95% |
| 5 | 2.92% |
| 6 | 2.88% |
| 7 | 2.87% |
| 8 | 2.87% |
| 11 | 2.92% |
| 12 | 2.87% |
| 13 | 2.86% |
| 14 | 2.74% |
| 15 | 2.76% |
| 18 | 2.76% |
| 19 | 2.76% |
| 20 | 2.75% |
| 21 | 2.72% |
| 22 | 2.72% |
| 26 | 2.75% |
| 27 | 2.74% |
| 28 | 2.70% |
| 29 | 2.71% |
| Average | 2.81% |
With that in mind, seems like the 10-year yield for the upcoming SSB February 2024 issue is looking to be around 2.81%. The interest rates have indicated to be on a downtrend and therefore as a long term holder, we should take into consideration further decreases and use the 2.75% as a risk free rate when making your purchase considerations.
Summary
With my market risk premium of 2.50% and the risk-free rate of approximately 2.75%, this would translate to a my expected dividend yield for new purchases to increase in 2024Q1 from 5.25% to 6.25%.
Whilst getting above 6.25% 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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