In the last article, we took the position that when we invest our funds in CPF-Life, we are trying to get a guaranteed cash flow from age 65 until we pass on. As CPF-Life payouts can, at best, mitigate the effects of inflation, it is unwise to put too much funds into CPF-Life as you would be over-insured. We concluded that setting aside about three times the Basic Retirement Sum would produce a cash flow that can provide a basic lifestyle for a 65-year-old Singaporean.
In today’s article, we will answer the other question – what can we do to replace the 4% CPF Special Account (CPF-SA)?
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Some suggestions on social media involve robo-advisors or global equity ETFs like VWRA. I will focus on a simple solution involving Singapore stocks as it minimises the effects of Forex risk. We should remember that a large part of the strength of the CPF-SA is that it is denominated in Singapore dollars, and systems like Malaysia’s EPF routinely provide higher interest rates.
How to screen for the best Singapore Stocks to replace CPF-SA
There are three points to note when screening for Singapore stocks to replace CPF-SA:
i) Stocks should invest in larger blue-chip companies
Larger companies have more staying power than smaller companies, and some have the backing of Temasek Holdings. When trying to replace CPF-SA, we should pick out stable companies with a lower probability of closing down. We will limit our stock picks to a stock universe consisting of 40 of the largest listed companies in SGX.
ii) Stocks should sustainably yield a minimum of 4%
As we are trying to replace the 4% lost to CPF-SA, we should only consider stocks with a minimum dividend yield of 4%. Furthermore, many companies declare dividends above their free cash flow, making their dividends unsustainable. We will remove companies that engage in this practice.
iii) Stocks should have the lowest volatility reasonably possible.
As we are trying to replace a 4% guaranteed cash flow, we should pick the remaining stocks with the lowest beta or market risk over the past three years. There will still be some volatility and market risk, but it would be much lower than portfolios experienced by many retail investors. After screening for sustainable dividends, we will only accept half the stocks with the lowest three-year beta.
Applying the criteria on a back tester on Quants Café results in the following:
Results are obtained from data from 23 February 2014 to 23 February 2024. Rebalancing of stocks occurs on an annual basis. All stocks are equally weighted by dollar value.
You can obtain reasonably impressive returns of 13.33%. However, as the standard deviation of the portfolio is relatively high, you can have a 99% monthly Value at Risk of 13.33% / 12 – 2.33 x (20.32/3.46) or 12.57% – On a lousy month, losing about 12.57% of portfolio value may not be unusual.
You are sacrificing predictability for performance.
What would the screener recommend when looking for stocks on 25 February 2024?
- Capitaland Ascendas REIT
- Frasers Property
- Jardine Cycle and Carriage
- Mapletree Industrial Trust
- ST Engineering
- Thaibev
- Venture
One critique of this list is that some stocks earn revenues in currencies other than SGD, like Thai Beverage. Also, as the list contains just seven stocks, the portfolio lacks adequate diversification. I found that removing the criteria that insist that free cash flow exceeds dividends paid out will increase the stocks shortlisted to about 14 with a slight reduction in returns performance. Investors can also add a bank counter like DBS to raise overall dividend yields and diversify their portfolio.
The loss of CPF Special Account for CPF members means that a source of riskless 4% is gone once the member reaches 55 years old, but it is not the end of the world. After we lock in a guaranteed payout on CPF Life, we can afford to take on more market risk with our remaining funds, and the local stock market can be the source of investment ideas to have returns that vastly exceed that of the CPF Special Account.
For more articles on how the CPF SA Closure affects you, read:
- Budget 2024 CPF changes: How much do you need to commit to your CPF Retirement Account?
- CPF Changes: ERS Now 4x BRS But Kiss CPF SA Shielding Goodbye
- The return for RA is 4.08%, but the return for CPF LIFE is not!
- 4 alternative to CPF SA Shielding
For an in-depth explanation on annuities and how you can use a Dividend Portfolio to enhance your CPF Life strategy, watch my video here:
And join me at my live webinar to discover: How I Build Early Retirement Portfolio that allowed me to retire at 39. p.s. the portfolio currently yields ~6.75%
