Monday blues?

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Financial freedom is the way to get out of the rat race! Stay on the course with me!

Be a blue chip

As my readers know, I enjoy buying into blue chip companies as they are (relatively) safe. We should aspire to be a blue chip in our workplace as well.

In your company, you should be

1) Well known for the right reasons.

2) Mature and steady (stable) professional.

3) Indispensable as you provide services and expertise that is of necessity even during economic downturns.

4) Earning consistently high income and getting at least 5% increment (growth) annually.

5) Paying out dividends in the form of treats, gifts to your colleagues as work success is usually a team effort.

Outside your company, you should be giving out

1) Tax deductible cash dividends to charity as the kind will be rewarded.
2) Non tax-exempt cash dividends to your family as they are the ones whom you are working for.

On your own, you should set short, mid and long term plans so as to ensure you have planned adequately for your future. Be a person who is always equipped with proper planning and life will never go too wrong for you.

Be a blue chip, buy the blue chips, grow with the blue chips and you will always be prosperous.

Cheers!

Preference shares: are they to be preferred?

Extracted from BT online

June 7, 2008

PREFERENCE shares have been hitting the headlines lately. First there was DBS Bank's $1.5 billion issue which drew much flak for shutting out retail investors. OCBC Bank, on the other hand, decided to offer its $1 billion preference shares to both institutional and retail investors.

Both DBS's and OCBC's preference shares are attracting a lot of demand because of their high dividend yields. In DBS Bank's case, the issue pays 5.75 per cent in the first 10 years, before becoming floating-rate notes paying 3.415 percentage points above the three-month Singapore dollar swap rate. OCBC pays a fixed dividend of 5.1 per cent.

Two readers have written to me, hoping that this column could help explain some of the technicalities of preference shares. And coincidentally, both of them brought up City Developments' preference shares. So we'll look at preference shares this week.
First, some basic knowledge. Preference or preferred shares, as the name suggests, have priority over common or ordinary shares when it comes to dividends and entitlement to the proceeds of sale or liquidation. In exchange for this privileged position, preferred shareholders usually give up their right to participate fully in the success of the company. In other words, if the company stumbles onto a new technology that will earn it a lot of money in the years to come, common shareholders are likely to see their share price rise significantly in anticipation of the bigger share in the profits that they are entitled to.

Preference shareholders, on the other hand, will only be entitled to the fixed dividends. Instead, the price of the preference shares will react to the general movement of the interest rate in the market. If the market interest rate goes up, the price of the preference shares will fall, and vice versa.

Redeemable by holders?

Dividend payments for the preference shares can be cumulative or non-cumulative. For cumulative preference shares, if, say, the company does not have the cash to pay out the dividends this year, it will have to pay out this year's dividends, as well as next year's, the following year. Dividend arrears must be paid before any dividend can be paid to common shareholders.

Preferred shares are almost always callable by the issuer, which means the company can decide to buy back the preference shares from the investors after a certain date. In DBS Bank's case, it can redeem the preference shares after June 2018.

Some preference shares, however, are redeemable by the preferred shareholders, often over a period of years with a guaranteed future value for the shares. In analysing companies with such preference shares, one should treat the preference shares as debt. They should be included as debt in solvency ratios, and the dividend payments should be treated as interest. Also, such redeemable preferred shares should be excluded from shareholders' equity.

There is one point which investors have to note, though. Companies cannot be forced to pay the dividends or redeem the preferred shares. Unlike creditors, preferred shareholders do not have the power to force the company into bankruptcy for non-compliance with the terms of the agreement.

Another form of preferred shares can be converted into common shares. CityDev's preference shares are one such instrument.

Now, let's look at CityDev's preference shares more closely.

CityDev's preference shares - issued in 2004 - are non-cumulative and do not have fixed dividend payout. Its board of directors will decide on the rate every year, but the payout will not exceed 3.9 per cent (net) per year over its issue price of $1. The board is under no obligation to make any dividend payment.

The preference shares, however, are convertible to CityDev's ordinary shares any time after the second anniversary of their issue. But only the company can decide if and when they want to do the conversion. The holders have no say in the matter.

One thousand preference shares can be converted to 136 ordinary CityDev shares. In other words, it would take 7.35 preference shares to convert to one CityDev share.

In the event that CityDev exercises its right of conversion, it will pay the holders of preference shares a one-off additional preference cash dividend of 64 cents per share.

As of yesterday, the preference shares were selling for $1.79 and CityDev's shares were last traded at $11.18. The two readers pointed out to me that the preference shares are trading at a huge discount to the ordinary shares.

Let's work through the numbers. It takes 7.35 preference shares to get one ordinary share. And when they are converted, each preference share will receive 64 cents.

So one preference share is entitled to 1/7.35 ordinary shares. Based on the last transacted price of CityDev yesterday, one preference share can be exchanged for 1/7.35 of CityDev's ordinary share of $11.18. That works out to $1.52.

But when there is a conversion, the preference shareholders will receive cash of 64 cents per preference share. So theoretically, based on yesterday's price, the preference shares should be trading at $1.52+$0.64, which is $2.16.

Given that the preference shares are selling at $1.79, there appears to be a 'discount'.
But wait. Only CityDev can decide if and when it wants to convert the shares. And it can decide never to do so because the preference shares are a perpetual instrument.

If this is the case, then investors are holding on to something that pays no more than 3.9 cents a year. That's a yield of zero to a maximum of 2.2 per cent (over $1.79). The exit for investors, if CityDev does not convert the shares, will be to sell the shares in the market. The problem with this is, the instrument is very illiquid. No trade was done yesterday. There was a wide spread in the bid and offer prices. A buyer was willing to buy at $1.46 and a seller was willing to sell at $1.79.

Hence the 'discount' is to take into account the numerous negative attributes of the instrument.
In comparison, there is certainty in the dividend payout of the DBS Bank's and OCBC Bank's preference shares, and the yields are attractive, given the current interest rate environment. This explains the relative attractiveness of the banks' preference shares vis-a-vis CityDev's.
A 5 to 6 per cent yield is undeniably attractive. But this sort of yields may not be that difficult to find among the stocks trading on the Singapore Exchange given the current depressed stock prices. If some of the these companies keep up the same amount of dividends they paid in the last financial year, yields of up to 10 per cent can be pocketed.

Good dividends

I've compiled some of the stocks which paid out relatively generous dividends last year. (see table)

Vehicle inspection and testing service provider Vicom last year paid out 18.25 cents of dividends. Compared with a traded price of $1.87, the yield worked out to be 9.8 per cent. Of course, included in last year's dividend was a special payout of 12.5 cents. But, there was one special dividend too in 2006. That year, the total payout amounted to 14.65 cents.

Singapore Petroleum Company paid out a dividend of 60 cents last year. That's a yield of 9.26 per cent based on a traded price of $6.48.

Cerebos Pacific, Singapore Food Industries, Singapore Airlines, ComfortDelGro and Singapore Press Holdings, if they keep up their last year's payout, will all be yielding above 6 per cent.
The question, of course, is whether companies paying good dividends can maintain their dividend policy. For a few of the companies mentioned, they enjoy a strong franchise and are generating cash by the oodles. And for one or two, the business prospects actually look good going forward. So there are still attractive investments out there that do not carry too much risks.

The writer is a CFA charterholder. She can be reached at hooiling@sph.com.sg

Sgbluechip says: Starhub is also a defensive dividend stock. At current price of $2.87, dividend yield is 6.27%. Management have indicated that it will be distributing a minimum of $0.18 per share dividend for FY 08.

I do agree that valuations of dividend stocks are depressed due to poor market sentiments. However, transportation theme stocks will still face downward pressure due to uptrending crude oil prices.

The poor rich

Extracted from ST online

June 4, 2008

Would you prefer to live in a world where you earn $60,000 a year while those around you average $40,000, or one in which you earn $100,000 but everyone else gets $200,000?

Robert H. Frank, professor of economics at Cornell University, says that most people find the first option more attractive. When it comes to salaries, we care more about relative size than absolute size. What matters most is earning more than our neighbours.

The same holds true for all sorts of things. The actual size of our apartment matters less than its size compared to everyone else's. And most of us will settle for a modest car - provided our neighbour is driving something worse.

Prof Frank labels things like salaries, houses and cars as positional goods, whose defining characteristic is that the amount of satisfaction we get from them is strongly influenced by comparison with what others have.

The American essayist H. L. Mencken hit the nail squarely on the head when he defined wealth as 'any income that is at least one hundred dollars more a year than the income of one's wife's sister's husband'.

It is a sobering thought. We assume that getting a pay rise, or moving into a new apartment, or trading-up to a better car will bring us increased levels of happiness and satisfaction. In fact, many of us simply raise the bar on what counts as adequate.

We work longer hours, earn more, spend more and consume more. Meanwhile, everyone else does the same. So, by comparison, we are no better off, and therefore no happier.

After German reunification in 1990, living standards in East Germany increased dramatically. Despite this, happiness levels actually fell. The East Germans were better off, but began to compare themselves unfavourably with the more affluent West Germans.

But not all goods are positional. Try answering this question: Would you prefer to live in a world where you have two weeks' vacation while those around you average one week, or a world in which you have four week's vacation but everyone else gets six weeks? Most people prefer the second option. With vacation time, the absolute amount is more important than the relative amount.

The same holds true for things like health and marriage. The satisfaction we derive from them is not strongly influenced by a comparison with those around us. Our enjoyment of good health is not spoiled by the knowledge that our colleagues are also fit and well. We do not enjoy our marriages any less because our neighbours are happily married.

Prof Frank labels things like vacation time, health and marriage non-positional goods.

The problem we face, as individuals and as a society, is that the balance of our lives can all-too-easily become shifted too much towards the acquisition of positional goods rather than non-positional ones. Our tendency to compare ourselves to others on things like salary, house and a car, can make us spend too much time and energy in pursuit of them.

Research suggests that most Americans would be healthier and happier if they worked fewer hours. But the relentless desire to keep up with the Joneses prevents them from doing so.

All too often, we base decisions on a flawed theory of happiness that puts undue emphasis on positional goods. We sacrifice leisure time and family time to stay in the rat race.

British economist Richard Layard and the author of Happiness: Lessons From A New Science, puts it succinctly. 'Most people are not rivalrous about their leisure. But they are rivalrous about income, and that rivalry is self-defeating. There is thus a tendency to sacrifice too much leisure in order to increase income.'

I used to teach in a primary school. I had a colleague, a middle-aged woman who often complained that the demands of teaching full-time and looking after a family left her feeling stressed out and exhausted. She often talked about going part-time. Since her husband earned a good salary, she could have afforded to do so.

Then, a part-time job came up at the school where we worked. To my surprise, she didn't apply for it - she had decided to build an extension to her house and needed to work full-time in order to pay for it.

It seemed to me that she had traded quality of life for double-glazing. It is a trap we can all very easily fall into.

gary@garyhayden.co.uk

Gary Hayden is a freelance writer who specialises in education, science, philosophy, health, well-being, travel and short fiction.

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Sgbluechip says: Gary's article is simple, direct yet philosophical. Indeed, while we are on our journey to financial freedom, remember the goal behind it is to be happy ultimately. It would be pointless to gain everything in the world only losing happiness in the process.

We all hate the rat race, the unreasonable boss, the backstabbing colleagues, the overwhelming workload, the miserly pay and the uncontrollable inflation. Financial freedom can put an end to all the above. But remember not to lose yourself when you have reached the end and forget who you are in the beginning.

Stretch your dollar series: 5% rebate on your income tax

Maybank is currently having a promotion. By depositing $3000 and above into the SaveUp account and arrange for GIRO payments on your income tax, you are entitled up to 5% income tax rebate. The condition is to maintain at least $3000 in your account or 24 times your monthly GIRO payment, whichever is higher.

Example:

Income tax payable $1200

Monthly payments: $100

To be eligible for $5 (5%) rebate monthly, you need to maintain $3000+$100(income tax installment) in your SaveUp account.

Unless your income tax payable is $1501 or more, you do not need to maintain more than $3000+income tax installment.

I have to remind readers that a 5% rebate on your income tax is NOT equal to 5% return.

With reference to the above example, by depositing $4200 in the SaveUp account, you will eventually get a $60 rebate one year later. This works out to be roughly 1.4% return. The return will be higher if you maintain the minimum deposit of $3100 monthly. However, the return will not exceed 2%. (60/3000 X 100%)

Take note that you will also be entitled a 0.5% interest on your deposit in the SaveUp account.

Is it worth it?

I believe the 5% rebate is a steal for those who already have an existing GIRO arrangement. You just need to bring your income assessment slip to Maybank and they will help you with the rest.

If you are like me who usually pay your income tax using Diners credit card, it might not worth the trouble, time, paperwork and opportunity cost to get a 1.4% return. I read it as a fixed deposit package instead. I prefer to invest idle cash!

Also, the rebate is a promotion, hence if it ceases next year, I will need to take time off to terminate the account and make new arrangements.

To each his own!

The link is here:

http://info.maybank2u.com.sg/personal/deposits/incometax_giro_promo.htm

12 random companies’ dividend payout months

Quarterly payout

Singpost:

February........July*.............August..............November

DBS:

April*............June..............August..............November

Starhub:

May*.............June..............August...............November



Semi annual payout

Singtel: January..................August*

SPH: May..........................December*

UOB: May*.........................September

Keppel: May*......................August

Comfort: May*....................September

SIA: August*.......................November

SMRT: August*....................November


Annual payout

Allgreen: May*

Capitaland: May*


* Final dividend for financial year (usually a bigger dividend payout)

Stretch your dollar series: Standard Chartered Bank 10% cashback

I just received a mailer from Standard Chartered Bank (SCB) stating that I will be eligible for a 10% cashback (of up to $100) for all retail purchases charged to my credit card (CC).

I was elated as I have 2 credit card accounts with SCB and that means I can get up to $200 rebates by spending $1000 on each card.

In order to confirm the offer, I made a call to their platinum hotline. Luckily, I checked and it was then I realized that only my VISA Platinum was eligible for the GSS promotion. The promotion has started and will end on 20th July. The cashback will be credited to my CC account by end August.

This is still good news! Last year when I applied for the Master card, I was given the 10% rebate a month later promptly. I merely spent on necessities such as petrol, coupons and Starhub bills.

For Starhub bills, I went down to Starhub centre and paid the bills 10 months in advance. I remembered paying $300 for my phone bill, $400 for my cable TV, together with some arrears. (I usually pay Starhub after getting repeated reminders. I cannot do that for Singtel though, as it levies at $0.50 reminder fine!)

This is as good as earning a 10% interest by depositing $1000 into my Starhub account! On top of that, I get to earn CC and Starhub points!

Alternatively, I can splurge on a new desktop at a 10% discount. However, I hope I can resist the temptation of IT fair!

Check your postal box now!

Take note that only customers who have received the mailers are eligible for this promotion.