Category Archives: Investing

TED Spread Ringing the Alarm Bells?

I’ve been watching the TED Spread move up and up over the last couple of months which has been ringing the alarm bells in my head and stopping me from returning to the share market. With news from Europe talking about banks being exposed to European government bonds then the credit system looks like it’s starting to freeze up again. The last time that happened it wasn’t pretty!

TED Spread Chat

TED Spread Chat

“The TED Spread is the difference between the interest rates on interbank loans and on short-term U.S. government debt (“T-bills”). TED is an acronym formed from T-Bill and ED, the ticker symbol for the Eurodollar futures contract.” Wikipedia

Typically the TED Spread sits between a range of 20-50 basis points. Over that range is considered a sign that there is perceived credit risk in the system. This means that with the TED Spread now over the 50 basis points mark that the bankers are not trusting each other.

You can see how good an indicator the TED Spread is for times of financial turbulence by looking at the TED Spread 5 year chart. The problems of 2008-2009 are clearly seen.

TED Spread 5 Year Chart

TED Spread 5 Year Chart

Credit, where credit is due (no pun intended), you can access this information on Bloomberg’s site.

While the current TED Spread of around 57 basis points is tiny when compared to the peak in 2009 you can see that it is definitely above the “normal” area and heading into dangerous territory.

With all the news coming out of Europe of “solutions” to their debt problems it looks like whatever the Europeans do it’s not having a material impact on the TED Spread. That translates to me as “the bankers are not buying the politicians solutions.” and that’s the reason why the alarm bells are ringing in my head!

 



Singtel Announces Dividend Record and Payment Date

Singtel finally announced its dividend record and payment dates for the year ending  March 31, 2011. This includes the payment of a final dividend of 9.0 cents and a special dividend of 10.0 cents. The record date is August 10, 2011 at 17:00 and the payment date is August 26, 2011.

While it is great to finally receive the notice of the record and payment dates I do wish they were far earlier! I’m not sure I want to hold onto Singtel shares for that long given the market downturn, which really seems to have taken hold in the USA, Australia and most other markets since April-May peaks.

Since my previous post I have sold my Starhub ($2.78) and SP Ausnet ($1.20) shares to try and minimize any further impact of the downturn. I’ll be keeping an eye on my other shares for the rest of June and determine which ones I can sell as I move back into cash.

I’ve also decided to start watching price movements of high dividend paying stocks around their dividend record dates to determine if a hit and run strategy makes sense for some shares. I suspect the costs of buying and selling will outweigh the benefits, but I’ll do the analysis and evaluate the approach before making a final decision.



Generating Income with High Dividend Paying Shares – May Update

Edited on June 03 to add a Starhub dividend payment I missed.

It’s over three months since my last post on the shares that I was looking to purchase to generate income through high dividend payments. Therefore, I thought it was about time to provide an update on my portfolio’s performance.

I have created a table to keep track of my stock purchases including the dividends paid and the profit/loss thus far.

Stock Date Purchased Purchase Price
Market Price Profit/Loss
SPH 16/02/11 $3.98 $3.86 -3.02%
Singtel 22/02/11 $2.92 $3.21 9.86%
Singtel 18/03/11 $2.87 $3.21 11.77%
SP Ausnet 16/02/11 $1.14 $1.20 5.45%
Starhub 16/02/11 $2.62 $2.79 6.57%
SingPost 16/02/11 $1.17 $1.14 -2.48%
Stock Dividend Total Profit/Loss (Capital+Dividend)
SPH $0.07 -1.26%
Singtel $0.19 16.36%
Singtel $0.19 18.38%
SP Ausnet $0.052 10.02%
Starhub $0.10 10.39%
SingPost $0.025 -0.34%

Looking at the numbers thus far, I have made a 5% profit on the capital (including purchasing costs), which increases to an 9.1% profit when including announced dividends. Given most of the purchases were in the middle of February that equates to more than 15% p/a and 27.5% p/a respectively. This is better than what I had expected, although it was helped by some companies paying special dividends on top of their normal payouts.

However, I’m now getting a bit nervous about the overall world economy for a few reasons:

  1. Growing Euro Zone debt problems.
  2. USA debt ceiling negotiation problems.
  3. End of Quantitative Easing II (QEII) in June.
  4. Signs of growing inflation and slowing global economic growth.

Any one of the above could cause a pull back on the markets and any combination would probably cause major drops. Therefore, I’m very tempted to get out of the market with the gains that I have already made.

Unfortunately I can’t just sell all the shares to take the stated profit and run. As I mentioned above the calculations include announced dividends, not paid dividends. Some companies are quite tardy in their payments (Singtel hasn’t even announced payment dates!), while others are relatively quick to payout (SPH).

SPH paid its dividend on May 24, 2011, while Starhub is next in line to pay on June 02, 2011. Unfortunately SPH’s share price has gone down since I purchased it, but I’m happy to hold on to the stock for the moment. Starhub is looking quite attractive at $2.79, to take both the dividend and capital gain, for roughly an 9% profit after costs. I’m also tempted to sell my Singtel shares at $3.21, but I really want that nice dividend, so I’ll wait for the payment dates to be announced before making a final decision.

SP Ausnet is a special case with the dividend payment due at the end of June, right when I expect the end of QEII to be making people have a serious think about their market exposure. If things do go pear shaped then the Aussie dollar would likely pull back against the Singapore dollar. This would decrease the value of both the share price and dividend of SP Ausnet, so depending how things go I may have to just take the capital gain and forget about the dividend. I can always buy the stock on the Aussie share market if the Aussie dollar dives and then make some gain on the currency once it recovers too.

I did know that the problems I listed above were likely to bite in the middle of this year, so I was quite prepared to get out of the share market around this time. Therefore, I feel like I’m becoming a bit of a short term investor, rather than a long term buy-and-hold investor. This has made me wonder if many people have much luck with a hit and run investment approach on high dividend paying stocks. That is, an investor purchases the share before the price build up in anticipation of the dividend payout and then sells again once the stock recovers from its expected post dividend drop. This would limit an investor’s exposure to major shocks, while still maintaining the income stream. There are the higher buying and selling costs to consider if using this method. I’d be interested to know if anyone has tried this? Feel free to drop a comment below!

Disclaimer: The above is my own opinion and not financial advice.