Bad News For Income Seekers

Ser Jing - One Interesting Bank Chart (pic)First some good news. Singapore consumers expect the rate of inflation to fall next year. The latest Singapore Index of Inflation Expectations (SInDEx) reveals that the public believes that the inflation rate could fall from 3.99% to 3.92%.

That’s the good news.

The not-so-good news, though, is that consumers reckon in five years the rate of inflation could rise to 4.7%.

So, whilst inflation may moderate in the near term, the outlook for rising prices over the longer term appears less rosy.

But there’s more bad news, especially for income investors. Currently, only six of the 30 companies that make up the Straits Times Index (SGX: ^STI) have delivered yields that either match or exceed consumers’ inflation expectations.

The six blue-chip companies that have historical dividend yields greater than 3.92% include Singapore Press Holdings (SGX: T39), CapitaMall Trust (SGX: C38U), SIA Engineering (SGX: S59) and Jardine Cycle & Carriage (SGX: C07).

The group of high-yielders also include two of the country’s largest telecom providers, namely Singapore Telecoms and StarHub. Their historical yields are around 4.5%.

The search for income shares could get harder as the crop of low-hanging, high-yielding shares dwindles with rising stock prices.

However, it is important to resist chasing yield for yield sake. Instead, consider carefully a company’s ability to raise its payout over time rather than one that might have a high payout today but unlikely to lift it in the future.

A share with, say, a modest 4% yield today but likely to increase its payout at 5% a year would translate to a yield-on-cost of 4.8% after five years. What’s more, the increase in yield might be accompanied by some capital growth too.

So don’t always restrict your search for income shares amongst the low-hanging fruit. Try to look a little higher up the tree and you may find some shares that could taste sweeter when they ripen in a few years’ time.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.