Double whammy on retirement plans: No dividends distributed and capital loss on paper

I thought it would be interesting to revisit an actual investment case example that was published in February 2017 and critic on whether it would work today. Everyone loves an inspirational story, will the following work or kill your retirement plans for you today?

This article appeared in the Hong Kong Economic Journal on Feb. 22 2017

Investing about HK$19,000 every month in the same stock for 11 years

A 33-year-old taxi driver in Hong Kong decided to retire in 2017 after 11 years in amassing 40,000 HSBC shares. He started since 22, DCA-ing every dollar saved to buy shares in HSBC Holdings (0005.HK).

He started buying the shares when it was trading at around HK$150 a share and continued sticking to his commitment even when the stock plunged at one point to HK$33.

As of January 2017, he was able to accumulate 40,000 shares, with a market value of around HK$2.6 million. Back then, it means he could receive an annual dividend payment of HK$160,000 (or HK$13,000 per month), based on the bank’s latest full-year dividend payout of 51 US cents.

He deems his simple lifestyle (sleeping, sports and video games are his favorite pastimes) is enough for the dividend income from his HSBC shares to sustain him for the rest of his life.

FIRE movement only began gaining traction in perhaps recent years. As compared to his peers, Taxi-uncle was astute to create his alternate stream of income when he was young.

Dollar Cost Averaging (DCA) isn’t easy all the time, especially when the price dived 5 times under at one point in history. While it can’t be faulted for the average investor — it is indeed a sound strategy when applied to investment in good companies which are undervalued due to circumstances not of their own fault — What is more concerning is being highly vested into single stocks or as we shall know, even seemingly strong, stable and big companies. The equivalent of HSBC Holdings for us in the local context is the Big 3 — DBS, UOB and OCBC banks. Are they perpetually safe? Think Wirecard and Luckin Coffee collapse in 2020. Never say never.

Taxi-uncle took a bet and seemingly succeeded in 2017.

Fast forward to year 2020, where he is now 36 years old:

At market close on 26 Jun 2020, his 40,000 shares would have had a market value of around HK$1.5 million (HK$36.70 per share).

On 31 March 2020, HSBC announced it was cancelling the fourth interim dividend for 2019 amid the economic uncertainty surrounding the coronavirus pandemic, and would not be paying the first three interim dividends for 2020.

HSBC Holdings, based in London but generate much of their revenue in Asia, was among six lenders requested by the Prudential Regulation Authority (PRA), a regulatory arm of the Bank of England to suspend their dividends as part of a coordinated response.

Assuming that the taxi uncle is already retired and living on his one and single stock, he is facing a double whammy situation today. No dividends distributed till further notice for 2020 means no income for this year. Coupled with a market downturn and paper loss of HK$1.6 million, it does not make sense for him to liquidate some holdings to live by, in a scenario where it is conducive to invest more and not less.

The “saving grace” is that taxi-uncle is young. At a young age of 36 years old, going back to the workforce in the meantime is not hard. I can’t say the same for those who have retired or close to retirement when faced in the same scenario. Sad to say, there are indeed older generation who are highly vested in HSBC Holdings — seen as a high-yielding and stable dividend stock throughout generation — yet unable to seek recourse and have to look out for alternate income means for the rest of the year.

The other “saving grace” is that while the fourth interim dividend for 2019 is cancelled, the other three interim dividends for 2020 are just withheld, but not cancelled, yet. Investors are waiting for end-2020 for the call by the banks then. There are examples of many other stocks which would not be declaring a dividend for 2020, can you survive without this source of income?

Key take-aways:

The Good
1. Taxi-uncle started investing pretty early in life, investing much of what he saved rather spend it unnecessary in life pleasures.
2. He continued DCA-ing a fixed amount into his investment, regardless of market ups and downs.
3. Adapting to a simple lifestyle since starting work or practising delayed gratification.

The Not-so-ideal
1. Highly concentrated portfolio (of one stock), practically no diversification.
2. No alternate source of income, with dividends from one stock forming the single and main source.
3. Not reviewing or balancing stock portfolio.

P.S. I have a stake in HSBC Holdings myself, probably 3x lesser than Taxi-uncle. Wait he is only 1 year older than me, so that makes me an Uncle too.

Original Story in mandarin below:

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