Should I Buy DBS Shares with My SRS Account?

An earlier version of the article appeared on The Smart Investor website.

The quintessential Singapore bank, DBS Group (SGX: D05), is a well-liked stock among local investors.

Not only that, but the bank is also frequently touted as a suitable long-term investment.

In that vein, there’s merit to asking whether the bank’s shares are worth investing in via your Supplementary Retirement Scheme (SRS) Account.

First off, though, let us remind you as to why the SRS represents an ideal way to invest your extra savings.

The benefits of SRS

The SRS is a great tool for both tax savings and investment, and acts as a complementary addition to your CPF.

In fact, the Singapore government introduced the scheme in 2001 to encourage residents to do exactly that; save, invest for the future and earn tax relief, all at the same time.

As a Singaporean citizen or Permanent Resident (PR), the tax-free amount you can contribute is capped at S$15,300 per year while for foreigners, it is an even more impressive S$35,700 (with overall personal income tax reliefs capped at S$80,000 per year for tax residents).

Think of it this way: The more you contribute, the more tax dollars you get to keep!

It’s also interesting to note that as of the end of 2020, a whopping 26% (or nearly S$3.2 billion) of SRS funds were sitting idle in cash, according to data from the Ministry of Finance.

This is, however, already an improvement from the 30% to 35% cash level recorded between the years 2011 to 2018.

So, what does that cash yield as a return?

A minuscule 0.05% per year – far below the rate of inflation of around 2% to 3%.

Clearly, better uses can be found for this idle money.

So, why choose DBS?

The reasons to like DBS are manifold.

Put simply, the bank has proven to be a strong long-term performer.

The bank had just announced a set of record earnings for its fiscal 2021 first half, demonstrating its resilience in the face of the pandemic.

What’s more, the bank has also managed to grow its dividend strongly over the last few years, excluding last year when the Monetary Authority of Singapore called on banks to moderate their dividend payments in light of the downturn.

Its dividend back in 2009 was S$0.56 per share, but that has now more than doubled to S$1.23 per share 10 years later.

Even with the dividend restriction in place, DBS still paid out a total of S$0.87 in 2020.

With the recent restoration of dividends back to the S$0.33 per quarter level, the bank is signalling that it is willing to pay a total of S$1.32 per year in dividends.

That means the stock is offering a not-too-shabby 4.3% dividend yield based on the share price of S$30.78.

It’s certainly better than 0.05% you earn from cash in the savings account.

Investors should also note that the bank still has room to grow its dividend over time as it embarks on various growth initiatives such as acquisitions and new business divisions.

Rights issues

Another angle that investors should consider, particularly applicable for SRS investments, is the likelihood of a company regularly carrying out a rights issue or capital raising.

Given SRS contributions are capped at the respective tax-free limits, a cash call by a company could mean having to top up your SRS account to take part or even missing out entirely – if you’ve already maxed out your annual contribution.

In this respect, DBS does well.

It is a well-capitalised bank with a Core Equity Tier-1 Ratio of a robust 14.5%.

The last time it carried out a rights issue?

Back in 2008, and understandably so, given it was in the midst of the Global Financial Crisis.

Get Smart: It pays to be patient

Combine the above with the long-term investment approach you should be taking with an SRS account, and it makes sense.

The investment horizon of an SRS should be measured over the lifetime of your contributions (which in the case of Singaporean residents would be up to the statutory retirement age of 62).

Just like true long-term investing in the mould of Warren Buffett, whenever you look to put your SRS money to work, it pays to be patient.

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This article was written by Royston Yang of The Smart Investor.

Disclaimer: Royston Yang owns shares of DBS Group.