If you are an investor who is looking for a regular return, astock that consistently pays dividends could be an option. Some companies makeprofits year after year and distribute a steady stream of dividends to theirshareholders.
But putting your money directly into stocks is risky. If you divide your investment between, say, five highdividend paying companies, and one of them collapses, you could risk losing 20%of your capital.
Unit trusts offer a better option. They handle the stock selectionprocess for you and also monitor the investment portfolio on a constant basis.Additionally, your money is spread across a wide range of shares. This lowersyour level of risk. The fund could also invest in different asset classes,providing you with a well-diversified portfolio. You could never hope toachieve this level of diversification on your own.
Let’s see how dividend paying funds are different from other typesof investments and the advantages they offer:
1. You can diversify your risks by investing across countries
One of the most significant advantages that you gain by investingin a unit trust is that of diversification.
A prudent investor knows that it isn’t advisable to put all one’seggs into one basket. Diversifying across different companies, and evencountries is recommended.
A mutual fund allows you to achieve this objective. Consider the First State Dividend Advantage fund. The money that it has collected has been invested in the equity markets in several countries as shown below.
Asset allocation of the First State Dividend Advantage fund on 30 November2018
*Unit trusts hold some amount in cash so that they can takeadvantage of new investment opportunities. The money is also required forpaying dividends.
Now, if an individual investor had to deploy funds across allthese countries, it would require a significant investment amount.Additionally, it would be a full-time job to monitor such a highly diversifiedportfolio. By investing in a unit trust, you can overcome these issues.
2. They are highly liquid
An investment in a unit trust allows you to get your money back atshort notice. It is easy to buy units as well as to sell them. So, if you havepurchased a dividend paying unit trust and require the funds, it should besimple to liquidate your investment.
However, there is one factor that you should take into account. Somefunds may levy a fee for redemption and this could eat into the value of yourportfolio. Always check with your investment advisor if you are unsure.
3. They still allow you to invest based on your investmentobjectives
If, for instance, you are looking for a defensive investment portfolio, amid the uncertainty of a Sino-US trade war resolution, you might be interested to invest in a bond focused fund, like the Schroder ISF Global High Yield which invests in global bonds.
At the same time, you can also continue to receive your monthlydividends whenever they are announced.
4. They are less volatile than individual stocks
Stock prices can vary widely as the market rises or falls. Forexample, if you have bought shares in an oil company, and the price ofpetroleum drops, you could see the value of your investment fall.
However, an investment in a mutual fund is less volatile. The fundmanager invests in a basket of stocks. The fall in the price of one stock couldbe offset by the rise in the price of another. This will serve to protect thevalue of your investment and help to stabilise it.
5. They are managed by professionals
Buying into a unit trust gives you the benefit of a team ofprofessionals managing your money. You will gain the advantage of theirexperience and the fact that they monitor the portfolio on a constant basis.Investments that have poor prospects are liquidated. This money is reinvestedin financial instruments that aim to provide a better return.
6. Dividend paying funds have certain advantages over REITS
Real estate investment trusts or REITs are often touted as theideal option for investors looking for regular income. Singapore’s REIT sector is welldeveloped, and it is true that you can earn a respectable return by investingin REITs. Investors benefit because of a rule that stipulates that REITs needto pay out at least 90% of their profits to unitholders.
However, you should remember that these investments are dependentupon property investments. REITs cannot invest in the energy sector or banks orany other non-property related investment. This factor works in their favourwhen the real estate market is doing well but can go against them when propertyvalues decline.
The bottom line
If you are looking at an income paying investment, a dividendpaying unit trust can offer a good option. Of course, these investments docarry a certain degree of risk. It is advisable to select the fund carefullyand continue to monitor its performance as long as you hold it.
If you don’t have the time to do this or if you are not very familiar with the manner in which the financial markets operate, you could consider taking the advice from Investment Advisers from iFAST Global Markets, who will be able to make holistic recommendations, and construct the optimal portfolio for you, no matter what your investment objectives are.
(By ZUU online)
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