Ways to passive income
There are numerous ways of generating passive incomes. For instance, interests from bonds / P2P loans / Invoice financing, dividends from stocks, rental income from properties, etc.
- Personally, in Singapore, I would prefer dividends from stocks.
There are many ways to choose dividend stocks. However, the most important thing to avoid is not just choose any high yielding stocks without checking their financial fundamentals and also if their price are undervalued.
Comparing P2P loans and Invoice Financing with Stocks
When it comes to P2P loans and Invoice Financing, although the yields are typically higher than stocks, I personally feel that the risks are higher if we are to compare these to some of the financially stronger dividend yielding stocks. The balance somewhat tilts towards favorably to dividend stocks with strong fundamentals.
I reckon these might include Raffles Medical (Dividend yield: 3.25%), Vicom (Dividend yield: 3.11%), Kingsmen Creative (Dividend yield: 4.62%), QAF (Dividend yield: 4.46%) and ST Engineering (Dividend yield: 2.99%).
Looking at the above, one might think that their yield are nothing spectacular. That is especially obvious when you compare that to the potential yields from P2P loans and Invoice Financing where the annual simple interest can range from 10% to 16%, and annual effective interest (if you reinvest the monthly repayments) can range from 18% to 28%!
However, while a higher interest is one of the main advantage of P2P loans and Invoice Financing, there are also a number of drawbacks.
Decisions again and again
Firstly, unlike stocks, there are loan tenures for P2P loans and Invoice Financing. P2P loans typically has a term of less than one year, while invoice financing is even shorter – less than 3 months (mostly 1 month).
Hence, if you have invested in a great stock whose fundamentals are getting better each year, there is a good chance that earnings and dividend payout would increase year after year, for many years to come. In the US, they have the Dividend Aristocrats list which contains companies in the S&P 500 Index that have increased dividends every year for the last 25 straight years.
Should the above materialize, the yield after many years, when taken in relation to your initial buy price, would have multiplied many fold. And that is not considering the potential paper gains from the rise in stock price.
On the other hand, although the initial yield of P2P loans & Invoice financing are higher, every month (or at the end of the term), I would have to pick another loan/invoice financing to fund. This is not easy. P2P loans and Invoice financing are currently experiencing a ‘gold rush’ effect, as investors flock to invest in these funds almost as soon as they are launch. There is little time to analyze the companies’ fundamentals and often than not I am not able to participate as these loans are quickly funded. This rush to participate may sometimes cause me to be less vigilant in analyzing the risks. And in order to achieve a high effective interest return, I am exposed to new funds / risks almost every month.
Moreover, the fundamentals of some of these SMEs are not strong (not surprising, since if they were, they might have approached and received bank loans instead). A single late payment from one of their clients might affect their cash-flow. Being un-secure loans, should the companies go under, priority would be given to repayment to bank loans instead.
There are also cases whereby the companies are not truthful about the liabilities they have. They could have also taken on more loans once they obtain a loan from a P2P platform – those increasing their risk exposures.
Yes, these could similarly happen to listed companies. However, from my experience, I seldom have these issues with fundamentally strong listed companies, with long histories of earnings growth.
On the other hand, in my P2P loan portfolio, 1 company has been in arrears for 3 months and a bank has started bankruptcy proceeding against the company. For another company, they have an outstanding debt with their current factoring house of which they have not informed the platform previously (they claim they were not aware of it). Luckily, 2 directors of the borrower who are personal guarantors (husband and wife) have at least 2 private properties in Singapore that could be refinanced. Consequently, the platform has forced them to refinance one of them immediately, so as to obtain the cash to settle the debts.
No hurry when it comes to stocks
Coming back to stocks. I have plenty of time to study and read about the companies I want to invest in. I can easily find articles or analysts’ reports for many of them online. I do not need to make rash or quick decisions. I can mull over it over many days. I can also bid for the stocks after trading hours. Markets will always open on the next weekday. Yes, I don’t always get to buy at the price I want, but I am sure if I am patient enough, opportunities will come knocking again. And I am not just limited to the stocks listed on SGX, but also those in the US markets, Hong Kong exchange, KL exchange etc…
Yes, stock markets crash from time to time. We have recessions and the economy slow down. Your initial capital invested in stocks might vaporize in these events. However, similarly, for P2P loans / Invoice financing, there would also be increased defaults and loans in arrears should these events occur.
So what about property? After all many Asian Billionaires became rich via real estate (read here).
However, the rental yield in Singapore is low. Gross rental yields in Singapore remain poor, at around 2.5%. And that is not factoring the interest you have to fork out each out for the mortgage, annual property taxes, etc.
You wouldn’t own a Singapore condominium for rental yields! (read here)
Only a small correction
In addition, home prices in Singapore have increased 92 percent since 2003 but have only dropped 9 percent from their peak since September 2013. I doubt the downtrend will reverse anytime soon.
Why the ABSD and other property cooling measures should stay (read here)
However, unlike shares, bonds or P2P loans, to a buyer, a residential property is part financial asset, part basic human need. And as stated in the article above: “When the cost of acquiring property becomes prohibitively high, as is the case in cities such as Hong Kong and London — driven by foreign investment flows and extraordinary monetary stimulus — we may condemn an entire generation of young people and couples to sharing rental flats or rooms or living with their parents well into their adult years. This may have implications for the country’s push to get more young people to start their own families and boost fertility rates.”
I reckon that when there is no control and free market principles are at play, given the low interest rates & low unemployment – there is a high chance that property prices will enter bubble territory. The high prices are welcomed by existing home owners, but a bane to young couples seeking to buy their first apartment.
I have a colleague who has just gotten married this year. He, together with his wife was unable to purchase a BTO HDB flat, and had to buy a resale flat. Consequently, they bought a $600,000+ old resale flat somewhere near the central region of Singapore. Although it is a good location, I wonder how many years they need to pay to clear the mortgage.
Yes, the starting pay of graduates are slowly rising. Based on the latest Joint Graduate Employment Survey, the median gross monthly salary for fresh graduates employed in full-time permanent employment last year was S$3,300 (read here).
With a starting pay of $3000++ and a mortgage of $600,000++ (and probably some student loans) – it might be too stressful for some young couples. Having uncontrolled ultra expensive properties is akin to stealing wealth from the next generation.
Singapore ranked world’s most expensive city for 3rd year running (read here)
Nevertheless, there are rare times when investing in properties make sense (when the property market crashed). However I felt that now is not the time yet.