As a kid, my decision on which snacks to eat more often than not depended on what toy was included in the package. That might be rather similar to the popularity these days of dividend-yielding stocks in Singapore. It could perhaps be because of the attractiveness of dividend payouts, as well as the many recognizable “local brand” stocks such as CapitaLand and SPH that have drawn Singaporeans to invest in these stocks.
There are also many dividend-yielding unit trusts (UTs) and these funds present a viable option for investors to diversify their investments while forming the foundation of one’s investments. In addition, companies are in fact not obliged to make dividend payments on their stocks and dividends declared may change depending on companies’ earnings.
Investors looking for dividend income may find dividend paying unit trusts a safer bet than individual stocks, as the latter aggregates the available dividend income from multiple stocks, potentially providing a smoother income stream over time. So just how can unit trusts help you broaden your investments? We have a look here:
How Can You Use Unit Trusts to Diversify Your Portfolio
As we’ve mentioned in previous articles about how UTs work, the very nature of the fund and how it is not invested in just one individual stock lends itself very nicely to helping you diversify your investments. Your choice of fund can either be based on country, industry sector, or asset class but understanding your own investment objectives should ultimately help you decide whether the risk profile of a fund is appropriate.
If you are at the start of your investment journey, you can easily form a core portfolio of over 1,000 holdings through a single multi-asset fund. This is achieved through a combination of different asset classes, such as bonds and equity that help you to spread out your investment. This minimizes the risk of concentrating your investments in a few individual stocks whilst making it a lot more affordable as well (which we’ll touch on shortly).
Also, for people who are worried that building a comprehensive investment portfolio requires a high investment amount, UTs present a viable option to enter the investment market at a much lower level. For instance, investing in a single bond issue often requires a minimum investment of $200,000, whereas investing in a fixed income fund typically offers a broad portfolio of hundreds of fixed income securities from a low minimum of about $1,000.
How Are Dividends Paid Out?
Before jumping blindly into buying any fund that pays out dividends, it’s important to note how dividends are paid out. Why is this important? Because it’s indicative to a certain degree of whether or not the fund can actually sustain paying out that dividend.
Fundamentally, dividends can either be paid out through income, which is basically the coupons/dividends that the underlying holdings pay out, or paid out through capital, which is taken out from the originally invested amount. While there is no direct way to tell whether a fund is paying their dividends from gains made from the fund or through the original capital, investors can take a look at the fund’s portfolio yield and see if the dividend yields are aligned with that.
The other key mechanism of how UTs work is that there is a fund manager that manages the funds, so the diversification of your investments are done by professionals, and you can leave out the worrying or emotional decision making and focus on more on your returns and portfolio optimization. As with any investment, you must understand and be familiar with the strategies adopted by the fund manager before committing to invest.
What Sort of Fees Should You Expect?
Typically, there will usually be an upfront sales charge when you make a transaction. This isn’t just for purchases of unit trust but for other investments as well. Apart from that, you might find that non-banking service providers don’t charge an upfront fee, or their sales fees are low, but they make up for this by charging a recurring quarterly platform fee.
Apart from that, fund managers command an annual management fee. Think of this as some sort of commission for their professional services. At the end of the day, it’s extremely important to be aware of the fees you are paying, and not just focus on the returns you might potentially get, because these fees in a sense erode your net returns.
Where Can You Buy Unit Trusts?
Speaking to a Relationship Manager (RM) at a bank is the typical way to purchase UTs. You would have a conversation about your investment goals and needs through a quick Q&A with the RM, and their advice would generally be line with the organisation’s outlook on various investments and sectors.
These days, with everything happening in the digital realm, things have changed a lot. Doing your own research is a lot simpler now with the multitude of comparison tools available. Add to that the availability of web tools that allow you to transact on the go and monitor your holdings and returns easily. The pervasiveness of internet banking ties everything together to ensure that you can control all these things securely. Of course, the trick is to find a provider that gives you all these options (should you require them).
This article was brought to you by Standard Chartered Bank (Singapore) Limited (“SCBSL”).
Start your investment journey on SCBSL’s Online Unit Trust Platform today. Access over 300 funds, proprietary research tools and fund comparisons, and trade with zero platform fees. To find out more, click here.
This article is for information purposes only. It is not an offer, recommendation, or solicitation to anyone to enter into any investment transaction. It has not been prepared for any particular person or class of persons and does not constitute and should not be construed as investment advice nor an investment recommendation. It has been prepared without regard to the specific investment objectives, financial situation or particular needs of any particular person. You should seek advice from a financial adviser on the suitability of an investment for you, taking into account these factors before making a commitment to invest in an investment.