Regular Savings Plans, and the Case of the Missing Dividends
A couple of years ago, POEMS, OCBC and POSB bank had started to offer Regular Savings Plan (RSP), which allowed one to invest on the stock market via monthly contributions of as low as $100 in the form of either the ETF which tracks the STI, Singapore Bond Index, or specific share counters listed on the SGX. A detailed comparison can be found on the MoneySmart website.
What I am going to write here, is about how much are you actually getting back via investment with the 3 financial institutions, as compared to buying directly off the market.
First, let’s setup some rules for comparison:
- Either we put money to buy one lot of the STI ETF fund (Nikko AM STI ETF) on a monthly basis, or we do a lump sum investment and hold the ETF.
- Since the RSPs “went public” in July 2013, let’s start from then.
- As I am a rather “lepak” person, I copied data from BigFatPurse’s article on Dollar Cost Averaging and modified the formulas for this article.
- I will not reinvest the dividends, and keep it in the bank. This is to keep the dividend yield in line with the calculations as seen on SGXData from Pebbles Lab (and also the “rest of the brokerages”).
Thus, after some number crunching and calculation, the magic amount was 1600 shares, or 16 lots, as the Nikko AM STI ETF fund is sold in lots of 100 shares. Given the price as of time of writing, it is roughly $3.30 per share, ranging from $3.09 to $3.39, and thus, we shall invest $300 a month thereabouts.
Here is the chart if we were to use POSB’s Invest Saver plan at $300 a month:
Seems pretty alright at 1.2% dividend yield. I would have to pay $54 in commissions, though, and I got refunded $26.47 as they were excess cash after buying the fund.
Let’s compare now with the Standard Chartered Bank’s online trading account, where we have to manually buy the ETF fund off the market:
Looks like we paid lesser for our purchases, had an increase of 0.1% on our dividend yield and it is slightly cheaper, despite the extra 31 shares bought under the POSB InvestSaver plan.
Now let’s take a look at a lump sum investment if we used a brokerage firm:
We had increased our dividend yield to 2.8%! How is this possible? Are RSPs not a good financial instrument? Well, the answer is simple – because you were holding onto 1600 shares at the start, the amount of dividends that you would get is substantially higher from the start as compared to an RSP. However, we needed a lot of cash upfront!
So far, we have learnt that:
- It isn’t really feasible to invest monthly in a large amount – as the amount gets bigger, you would have to pay more in commissions monthly. The only advantage is that the RSP deducts the money from your bank account automatically. For this case, POSB wins because of the low commissions – up to a certain monthly amount, anyway.
- If you are disciplined and want lower commissions, it’s probably better to “DIY” with the Standard Chartered online trading account. This is as close as possible to buying directly off the market like a person buys stocks from the SGX, with the advantage of having low commissions. Otherwise, sticking to POSB/OCBC/POEMS would be the best.
- If cash isn’t a problem, go straight to the broker and buy the ETF from the market.
As it stands, it seems that the Regular Savings Plan is a good scheme for investment newbies and risk-adverse investors. However, what about those who need to “flex their financial clout” more? Well, here’s the issue – should one participate in the POSB RSP, you have no way to transfer out your ETF fund shares if you choose to stop investing and cash out – you would have to sell it off to get your cash back. This is a double-edged sword – in a bear market, you would have made a huge loss, but in a bull market, the risk of losing a portion of your money is manageable. It would probably be best to hold till the market recovers to an appropriate level to cash out, rather than selling off – provided you are in no dire need of cash in an emergency.