Tim Talks Money AMA #1

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Hey guys, I wanted to take a moment to try something new by opening up a financial “safe space” where I can directly address your specific questions, interests, and challenges. We shouldn’t be self-conscious about wanting to inform ourselves on what matters with our money.

Whether it's about navigating the latest market events, unpacking a complex financial concept, understanding the various asset classes or simply sharing practical money tips you can use day-to-day, this is your chance to ask me anything (AMA). 

Below are 3 questions I’ve received that I thought might be helpful to you:

Question 1: What do I need to know about dividend stocks? 

It's crucial to really understand what you're buying when it comes to dividend stocks. If you're aiming to get regular income through dividends, you need to grasp the actual cash flows of the companies you're investing in. Like any stock you buy, you really need to understand the business. If you’re not bothered to or don’t have the time, which is totally cool, then broad-based, exchange-traded funds (ETFs) are a great option.

So, back to dividend investing. First, make sure the dividend is sustainable. Second, ensure that the dividend isn't at risk of being cut because that’s going to be fatal to both your income streams and the share price. 

And third, be cautious if the dividend yield seems excessively high, as this can often lead to cuts down the line and is generally a sign the share price has been hammered (remember dividend yields go up when share prices go down).

High dividend yields are often a red flag (think of yields above 7-8%) because they're usually not sustainable in the long run. I’m a huge advocate for dividend stocks, as they offer investors a valuable opportunity to gain income from their stock holdings. 

But it’s essential to have a core portfolio, that makes up most of your portfolio, that includes key strategies like index ETFs which are tailored to your overall financial goals. 

Alongside this, a satellite strategy can give you the flexibility to experiment with whatever “floats your boat”. That could be individual stocks, unit trusts, cryptocurrencies, or other alternative assets. 

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Question 2: I’m based in Singapore. As a dividend investor, should I consider investing in the US? 

When thinking about investing into dividend stocks, it’s important to consider markets beyond our local or regional locales. The US is the largest stock market (and dividend market!) globally.

It has a long history of consistent dividend payments spanning several decades or longer. US companies are characterised by strong cash flows and a vast local market as well as international potential given their brand power.

It’s an affluent population that numbers close to 340 million, while many of its listed companies also have significant international businesses that provide further room for growth.

For dividend investors, the US should not be overlooked, despite the 30% withholding tax on dividend payments to shareholders who aren’t US citizens. 

While this tax might deter some investors in Asia and elsewhere, it's essentially the cost of entry into a market with high-quality dividends. Remember that some of these companies can grow dividends consistently at 10-20% annually over long stretches of time. You will rarely find that sort of dividend growth in Singapore or elsewhere in Asia.

Just as volatility is the price of admission to the stock markets, the withholding tax is the price for accessing the massive US dividend market. If we can stomach the 30% withholding tax today, we could be thanking ourselves in a decade’s time as compounding and dividend growth are allowed to work their magic.

Question 3: When investing myself, what type of ETF should I invest in?

For anyone who’s not a US citizen, I recommend considering UCITS ETFs. UCITS stands for “Undertakings for the Collective Investment in Transferable Securities”. Sounds dull and it is. 

It’s basically a regulatory framework in the EU that allows for the cross-border sale of funds to retail investors. The big excitement comes from the tax implications for investors.

These ETFs, listed on European exchanges (mainly London’s), offer a tax-efficient way to invest for anyone outside the US. They are domiciled in Ireland, which only imposes a 15% withholding tax on dividends—half of the 30% rate for US-listed ETFs.

For Singapore investors, this makes UCITS ETFs a more efficient option. If you’re looking to invest, consider big and reputable platforms like Interactive Brokers, which provide easy access to the London market at a reasonable cost. 

They offer a wide range of international markets, including the US, Canada, Europe, and Asia. Interactive Brokers is more of a DIY option, suitable for those who want direct control over their investments.

Alternatively, if you prefer a more managed approach, robo-advisors like Endowus can be a good choice. They offer a developed world index fund (run by BlackRock’s iShares) at a very low cost, making global investing accessible and straightforward. 

One thing you do need to note that with the robo-advisors is that you pay two levels of fees: the annual ETF fee and also the annual platform (Endowus, Syfe etc.) fee. The latter of these can add anywhere from 0.40% to 0.60% in additional fees versus just buying your own ETFs.