Own the Banks or let the Banks own our Money?

The 3 local banks, UOB, DBS and OCBC have announced their impressive Q4 and FY2019 financial results this week. All 3 banks registered not just increased revenue income and earnings, but RECORD HIGH annual earnings. What is worth highlighting to income investors is that they all dished out dividends of around 5%! which is higher than some of the branded Reits.

OCBC in particular has achieved a significant 34% increase in Q4 2019 earnings and increased their FY19 dividends by a whopping 23%. Dividends from OCBC used to lag UOB and DBS in terms of payout ratio due to their conservative management style. So they could have finally woke up.

The outlook for 2020 will be very challenging with the Covid-19 virus affecting China and the world greatly. The gloomy economy prospect and highly possible recession in Singapore and APAC region could result in massive retrenchments, unemployment, poor businesses and result in increased defaults in personal and corporate loans. Hence, there could be more bad debts and will have a huge impact on the bottom lines of banks. 

It is too early to tell how much the banks will suffer but I would anticipate the banks to not do as well as in 2019. Their share prices should fall and dividends may not increase in FY2020. It will be a good opportunity to start accumulating these bank shares as they start to decline, especially after they XD.

Dollar cost averaging is a good strategy to accumulate bank shares for long-term investments over a horizon of 1, 2 or even 3 to 5 decades. As the share price of banks are highly volatile, they offer opporunities for traders to take up short or short-term long positions to profit from the price swings.

I am biased towards accumulating more OCBC shares for long term at around their Net Asset Value price of $10.50 as they offer scrip dividend reinvestment consistently every year. This allows us to leverage on the power of compounding effect to grow our money till we retire as we can reinvest the dividends collected from OCBC shares back into OCBC at no cost. Over time, the rate of accumulating OCBC shares will increase exponentially. Hence, OCBC will a mainstay in my SRS portfolio. UOB and DBS, on the other hand, have stopped the scrip dividend scheme since 2017, so the dividends will be collected in cash, and if reinvested, will incur brokerage fees.  

Since DBS changed their dividends payout from bi-annually to quarterly, they have become more like a special 5% Bond with characteristics of a Reit paying quarterly dividends. This is especially enticing and attractive to income investors who favour consistent income of 5% or even higher if one could accumulate below share price of $25. When I have more ammunition in my war chest, I would whack DBS into my CDP account.

Instead of putting our spare money in the banks savings accounts to earn 0.05% or multiplier accounts to earn 1.5% interest rates with lots of conditions to fulfill in order for higher rates, we can simply purchase bank shares to own the banks that own our money and other people money to earn around 5% yield. Of course, that comes with risk of capital loss. However, for the long term, it makes sense to collect consistent dividends annually and ignore the day-to-day share price fluctuations of the banks. If we leave our spare money to let the banks own them, the banks will use your hard-earned money to loan out to companies or people buying properties or cars, without you knowing it. What you can see is just numbers of your money on the account balance but behind the scene, your money has been spent. I believe the benefits of owning banks will be highly rewarding to beat inflation and earn decent returns in the long run.

Thanks for reading! 

With Love & Peace,

Qiongster