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:

CPF Balances Update – June 2020

It is the end of June with all mandatory contributions in for the month.

OA to SA transfer for the month of June is also completed. SA balance currently stands at $107,057.49, slightly more than half of 2020 FRS or 59.1% of the journey.

In the current climate, it is better to have more cash on hand, though not for spending but for possible investment into stocks with higher potential for a better yield or capital gain. As such, there are 3 key takeaways for myself:

  1. Housing loan monthly installment is fully paid-up with CPF OA funds. This was versus transferring all to SA just a few months back for 4% p.a. interest.
  2. Hold off monthly contribution or RSTU to my SA to keep cash on hand.
  3. SA is still receiving the monthly contribution from employer and partially from OA to SA transfer (after taking into account housing loan monthly commitment)

The same goes for my child SA, so there is a slight deviation these few months to take advantage of opportunities in the equities market.

Regular Savings Plan Update – Jun 2020

Welcome back to Phase 2 of post-circuit breaker and after 2 months of cold storage, I am back again. Somehow people have the misconception that Working From Home equates to having more free time on hand. Well in a way, time never gets wasted. It just gets channeled into some other activities. For me, this has included a stronger bonding with my daughter, who basically faced me almost 24 hours a day — from the time she awakes to the time she turns in for the night.

So for my readers who had been following, my regular savings plan for my child had been relatively simple — just 2 stocks. But I would have to re-examine and improve on the choice along the way.

Philips POEMS ShareBuildersPlan, as I had just experienced, do not allow exercising of Rights, under this liner “Other Corporate actions (except right issue)” costs $10. This meant that the SIA (C6L) rights issue for my daughter’s current holdings, a combination of raising SGD 8.8 billion in new ordinary shares and mandatory convertible bonds (MCB), were automatically sold at the start of trading day without sales commission. Good and bad for some, I would lean it more towards the good in her case.

DescriptionTotal Amount (SGD)
Adj for Net Sales of SIA R 967 @S$1.04447$1,004.21
Adj for Net Sales of SIA MCB R 1902 @S$0.00781$9.49

Monthly Allocation for 19 June 2020 as follows , with a $1,587.20 (including our monthly $500 investment and sales proceeds from SIA rights issue and OCBC dividends) investment amount

CounterQuantityPriceInvestment Amount
OCBC Bank (O39)173$9.175$1587.20

Average Price of existing Portfolio counters

CounterTotal SharesAvg Price
OCBC Bank (O39)439$10.2974
SIA (C6L)645$8.6553

CPF Balances Update – March 2020

It is the end of March with all mandatory contributions and cash top up in for the month.

OA to SA transfer for the month of March is also completed. SA balance currently stands at $103,063.50, slightly more than half of 2020 FRS or 56.9% of the journey. Basic Healthcare Sum of $60,000 was met in the month of March!

March and February were busy months, largely due to my job nature dealing in business continuity and crisis management. Too much time is spent on Covid-19!

On of my absent-mindedness was to forget to top up my child’s SA as well as my own SA for the month of March. I will have to make do by contributing double the amount in April. SA balance still currently stands at $903.75.

Regular Savings Plan Update – March 2020

Monthly Allocation for 19 March 2020 as follows , with a $1000 investment amount

CounterQuantityPriceInvestment Amount
OCBC Bank (O39)11$8.690$95.59
SIA (C6L)134$6.698$897.59

Average Price of existing Portfolio counters

CounterTotal SharesAvg Price
OCBC Bank (O39)266$11.0277
SIA (C6L)645$8.6553