Build a mix of income holdings that does not rely on one sector or one type of payer.
Take the list of what pays you income now, or what you plan to buy, and write the sector beside each holding. Then imagine a year in which Singapore office rents fall, banks set aside more for bad loans, and hotel bookings drop. Parts of this have happened before. Suppose your portfolio is made of the most familiar SGX dividend payers: two banks, an office REIT, a hospitality REIT and a property developer. In that year every holding would be hit, and your income would fall with them.
This happens because the Singapore market leans heavily towards banks and property. Lesson 2.4, "The STI blue chips: income and concentration", showed that a portfolio built from familiar local dividend payers tends to end up as a bet on those two sectors. Lesson 6.5, "Map the sub-sectors you hold", showed a similar strong tilt towards Singapore property within REITs. This local tilt is not wrong in itself. If it happens by accident, though, you are carrying a risk you did not choose. The fix is to set limits before you pick holdings, then check your plan against those limits.
Banks, REITs, telecoms, utilities, consumer companies and industrials each respond differently to the economy. Write down the most of your income you will take from each one. That maximum is your sector limit. It applies across your whole income portfolio, with funds and fixed income included. A common approach is one limit for any single sector. You may want a tighter limit for banks and property, given everything else you already own in Singapore.
Within REITs, spread your income across sub-sectors: retail, office, industrial, data centre, healthcare and hospitality. Module 6 showed that these earn rent in very different ways. With that spread, a shock to offices or to travel reaches only one slice of your income. Set a sub-sector limit, which is the most income you will take from any one REIT sub-sector. The sub-sector limits you set in lesson 6.5 carry straight into this plan.
You also need to decide how to treat REITs as a whole. You can count each REIT sub-sector as its own sector, or you can also put a cap on REITs as a whole, as another investor might. Either way it is a choice, so write it down explicitly. What matters is that you decide the rule before you choose the holdings, and that it is on paper.
You do not have to build the spread one stock at a time. An STI ETF holds all thirty STI constituents in one fund, so problems at one company cannot hit you hard. A REIT ETF holds a basket of REITs, which gives you the same protection against any single REIT. The course "Build and run an ETF portfolio" covers how to compare STI ETFs and REIT ETFs.
Funds do not remove sector concentration. An STI ETF is still heavy in banks and property, and a REIT ETF is entirely property. Take each fund's sector weights from its factsheet and count them towards your limits, the same way you count single holdings.
Dividends and REIT distributions are not your only sources of income. Bonds, Singapore Government Securities, T-bills and Singapore Savings Bonds pay interest on a fixed timetable, and fixed deposits pay a stated rate. Income from these makes up your fixed income slice. The payments are set in advance, so this income is steadier than dividends, but it usually does not grow.
With a fixed income slice, one bad year for shares does not cut your whole income. It is the most direct way to make your income more reliable, and the cost is less growth over time. Fixed income does not count towards any share sector limit. The course "Bonds, T-bills, SSBs and fixed deposits" covers how each type works and how to choose between them.
Most local income holdings depend on Singapore. S-REITs with overseas assets, global funds and foreign bonds add exposure to other economies. They also bring the currency questions raised in lesson 6.4, "Overseas properties and currency risk". Decide how much of your income should depend on Singapore alone, and write that figure down with your other limits.
Take a planned income of S$12,000 a year, an example figure, as are all the amounts below. It comes from four sources:
Bank stocks: S$3,600, or 30% S-REITs: S$4,800, or 40%, made up of office S$1,800 (15%), retail S$1,500 (12.5%) and industrial S$1,500 (12.5%) Other SGX dividend stocks: S$1,200, or 10% T-bills, SSBs and bonds: S$2,400, or 20%
The parts add up: S$3,600 + S$4,800 + S$1,200 + S$2,400 = S$12,000. Within REITs, S$1,800 + S$1,500 + S$1,500 = S$4,800.
This investor's limits are 25% of income from any one stock sector and 15% from any one REIT sub-sector. Banks at 30% are over the 25% limit and need to come down. Office at exactly 15% sits at its limit. Retail and industrial, at 12.5% each, are inside it. The REIT total of 40% is above the 25% sector limit. That is acceptable only because this investor treats each REIT sub-sector as its own sector. The fixed income 20% does not count towards any share sector.
Wei Ling's first income pie looked much like this one. She then moved some of her bank income into fixed income and into a non-property sector.
For the activity, draw your own income as a pie by sector and source, and check it against your sector, sub-sector and Singapore limits. Any slices above your limits are your first changes to make.
Draw a pie chart of your current or planned income by sector and source. Mark any slice that is above your limit.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).