How can Unit Trusts (UTs) fits into a Dividend Portfolio?

Scope

• Factors to decide a dividend instrument
• Setting dividend investing goal
• Where and how to research UT?
• Weekly Dividends- 4 Fund strategy
• Parking for temporary Fund (cash management)

Background

Unit Trust (UT) is known for its high management fees and underperforming the index. I would agree and will not argue with these facts. However, the objective is to understand these vehicle and see how it could fits your financial goal to build a passive income stream.

Your defination of a good income producing instruments?

May it be dividend stock, ETFs or UTs their main purpose of owning them is to generate income for you. Those payout are deducted from the stocks price or the fund Net Asset Value (NAV), which impact on capital appreciation.

4 Factors to consider:

• Positive Total Returns (capital appreciation + dividend)
• stock price trend
• Dividend yield %

• Frequency of payout (monthly / quarterly / half-yearly / yearly)

I would assume that most of the Singaporean mainly invest in singapore market for dividends? Mainly because of 30% witholding tax imposed on US dividends, making US stock less desirable for dividend investors.

In term of total returns VYM, definately trump all. However, QYLD has the highest dividend payout, but the dividend yield greater than the total returns indicate that the ETF paying most of it earnings out as dividend and the price is trending down.

In my opinon, trending down stock price may not be ideal even if the total returns are positive. Because in some point in time, you may need money in an emergency and forced to sell the investment. On the other hand, if you are focus on total returns, might as well invest in CSPX, where dividend are accumulative to skip any tax. This leave us with only 2 choices for singapore ETF, and the winner is clear.

Setting dividend investing goal

Assume you target $3000 per month of dividend ($3000x12mth= $36k p.a.)

if your dividend yield is 4% p.a, you will need $36k / 0.04 = $900k invested. Approximately, with an initial investment of $50k and monthly contribution of $2k it will take 21 years. $554k will be your contribution, the rest will be your reinvested dividend.

http://www.moneychimp.com/calculator/compound_interest_calculator.htm

The only way to speed up the dividend snowballing effect, is to look for higher dividend yielding instrument that also have the same diversification, which bring us to Unit Trust. As illustrate by the table below, with higher yield the amount to be invested reduced.

Where and how to research dividend UT?

https://secure.fundsupermart.com/fsm/funds/fund-selector

1 Knowing the Assets class (you may leave this blank)

Equity fund- 100% stocks

Fixed income- 100% bonds

Balanced Fund- mixture of stocks + bonds

Alternative investment- contain any other assets classes that is not stocks & bonds

2 Always check "dividend paying only"

3 Select the currency you like to transact ( i prefer SGD or USD)

4 Click "Generate Funds Table"

5 Click on "Info Table"

6 Click on "Dividend yield (%)". This will sort in descending order, highest dividend to lowest. The table will show the frequency and if the dividend is payout / reinvested

7 Click "Performance Table". Look for fund at least with 5 years record. The total returns must be greater than %dividend else the is fund is trending down. The total returns had already factored in the fees.

8 Assume you choosen the fund. It will tell you which asset class. You can look at the "chart centre" for the performance (Note: the chart is total returns). Then click on "Fund Factsheet" to see the underlying holding.

Weekly Dividend- 4 Funds Strategy

You may build a dividend portfolio based on 4 funds and recieve weekly cashflow. You need to select 4 monthly payout fund under 4 different asset management. Because the dividend payout are fixed at certain week of the month for different asset managment. You may access the dividend payout date on the fund page.

The below table are some of the asset managements (Not all) of the past dividend payout date recorded.

Parking for temporary fund (cash management)

Sometime you have extra cash and want to park somewhere to earn some "interest". You may put it in funds. So just click on "3yr risk return ratio". The higher it is, the less likely to loss money. But also look at the fund performance and do you like the dividend payout/reinvest and frequency of payout. Is definately better than 1.5% or 2% (non guaranteed) product.

Conclusions

This article is to let you have a brief understanding about unit trust and see how it can helps you in constructing a dividend portfolio. There are definately good funds with higher returns and dividend relatively to SG ETFs

NEVER BUY UNIT TRUST FROM BANKS SAVE THE 5% SALES CHARGE.