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Should I Buy DBS Shares With My SRS?

The quintessential Singapore bank, DBS Group (SGX: D05), is a favourite stock among local investors. Not only that, but the bank is also frequently touted as a key long-term investment.

In that vein, there’s merit to asking whether the bank’s shares are worth investing in via your Supplementary Retirement Scheme (SRS). First, though, we should remind ourselves why the SRS is an ideal way to invest your extra savings.

SRS benefits

The SRS is a great tool for both tax savings and investment, as a complementary addition to your CPF. In fact, the Singapore government introduced the scheme in 2001 to encourage residents to do exactly that; save, invest for the future and earn tax relief, all at the same time.

As a Singaporean citizen or Permanent Resident (PR), the tax-free amount you can contribute is capped at S$15,300 per year while for foreigners, it is an even more impressive S$35,700 (with overall personal income tax reliefs capped at S$80,000 per year for tax residents). Think of it this way: The more you contribute, the more tax dollars you get to keep!

It’s also interesting to note that as of the end of 2017, according to the Ministry of Finance, a whopping 33% (or S$2.69 billion) of SRS funds were sitting idle in cash. So, what does that cash yield as a return? A minuscule 0.05% per year – far below the rate of inflation. Clearly, better uses can be found for it.

Why DBS?

The reasons to like DBS for your SRS account are manifold. Put simply, the bank has proven to be a strong long-term performer. It is riding high on a wave of digitalisation that is positioning it strongly as a fintech pioneer in the broader banking sector in Asia.

What’s more, the bank has also managed to strongly grow both its dividend and Return on Equity (ROE), with the latter reaching its highest level since 2007. Its dividend back in 2009 was S$0.56 per share, but that has now more than doubled to $1.20 per share as of its latest full-year earnings.

That means the stock is offering a not-too-shabby 4.4% dividend yield based on its current share price. Readers should also note that the bank still has room to grow its dividend over time as it currently only pays out around 56% of its profits as dividends.

Rights issues

Another angle investors should consider, particularly applicable for SRS investments, is the likelihood of a company regularly carrying out a rights issue or capital raising. Given SRS contributions are capped at the respective tax-free limits, a cash call by a company could mean having to top up your SRS account to take part or even missing out entirely – if you’ve already maxed out your annual contribution.

In this respect, DBS does well. It is a well-capitalised bank with a Core Equity Tier-1 Ratio of a robust 13.9%. The last time it carried out a rights issue? Back in 2008, and understandably so, given it was in the midst of the Global Financial Crisis.

It pays to be patient

Combine the above with the long-term investment approach you should be taking with an SRS account, and it makes sense. The investment horizon of an SRS should be measured over the lifetime of your contributions (which in the case of Singaporean residents would be up to the statutory retirement age of 62).

Just like true long-term investing in the mould of Warren Buffett, whenever you look to put your SRS money to work, it pays to be patient.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. The Motley Fool Singapore has recommended shares of DBS Group Holdings Ltd. Motley Fool Singapore contributor Tim Phillips doesn’t own shares in any companies mentioned.