Nikko AM Singapore Dividend Equity Fund: Achieve at least 5% dividend yield with this fund!

·       Singapore, a key player of the global semiconductor equipment market, is well-positioned to benefit from the recovery of global semiconductor sales driven by the technology sector.

·       As geopolitical tensions continue to grow between the US and China, Singapore has seen greater capital inflows and reallocation.

·       The portfolio manager views the technology and semiconductor sector positively due to the bottoming of the technology inventory cycle and AI-driven demand. They intend to increase the fund’s exposure to the sector.

·       By targeting companies with sustainable dividend payouts and prospects of growing dividends, the fund has managed to deliver an annual dividend yield of at least 5% since becoming a dividend fund in 2012.

·       This fund is suitable for investors seeking regular and predictable distributions from a portfolio of homegrown stocks.

The potential for a brighter future in the semiconductor industry is beneficial for Singapore, an economy driven by exports. With its highly skilled and productive workforce, Singapore is well-positioned as a centre for advanced manufacturing. The nation plays a crucial role in the global semiconductor industry, particularly in the downstream supply chain involving the testing and packaging of semiconductor products. Singapore holds a significant 20% share of the global semiconductor equipment market.

There were some signs of a recovery in Singapore’s semiconductor industry in January this year. Electronics exports pivoted to a positive growth of 0.7% YoY, marking an improvement from the 11.7% contraction in the prior month. The country’s manufacturing output also grew with precision engineering growing by 27.7% YoY due to higher production of front-end semiconductors and process control equipment.

Both electronics exports and manufacturing output continued to expand 5.2% YoY and 3.8% YoY in February respectively. However, Singapore’s electronics exports and manufacturing output slipped 9.4% YoY and 9.2% YoY in March. Despite this, manufacturing activity under precision engineering continued to expand. While March’s electronic exports may look gloomy, we are of the view that electronics exports and manufacturing output will be more stable in the coming months. With the recovery of global semiconductor sales driving a substantial increase in electronics demand, the electronics sector is poised to drive Singapore's export growth.

Furthermore, amidst the continuing geopolitical tensions between the US and China, Singapore has benefitted from increased capital inflows and reallocation to the region. This trend is fuelled by Singapore's geographic advantage, transparent legal systems, and tax incentives.

We forecast Singapore's GDP to rise by 4% in 2024, surpassing the Ministry of Trade and Industry's growth estimate of 1% to 3%.

Related article: Singapore’s GDP to soar by 4% in 2024, here’s how to capitalise on this

Nikko AM Singapore Dividend Equity Fund: Attractive annual dividend yield of at least 5%

For investors looking to seize the opportunities arising in Singapore's economic environment, our recommended fund is the Nikko AM Singapore Dividend Equity SGD. This fund stands out due to its portfolio allocation strategy, which is primarily guided by bottom-up fundamental analysis of stocks. It focuses on companies with sustainable dividend payouts, resilient business models, and proven management teams. This approach enables the fund to withstand market volatility over the long term.

The fund is managed on a total return basis and does not aim to outperform any specific benchmark.

In line with its investment objective, the fund adopts a sustainable dividend-focused strategy, concentrating on higher dividend-paying stocks with steady cashflows (Dividend Anchors). However, it also considers lower dividend-yielding stocks with prospects of growing their dividends (Dividend Growers).

The fund looks to deliver an attractive monthly distribution between 5% to 7% per year of NAV per unit. It has proven to achieve its target every year ever since it became a dividend fund in 2012. As of 31 March 2024, the dividend yield (excluding cash) for the overall portfolio stands at 5.89%.

Figure 1: Historical annual distribution yields since becoming a dividend fund

It is worth noting that the fund’s largest geographical exposure is to Singapore (89.8%) as of 31 March 2024. This is followed by Hong Kong (2.8%) and Thailand (1.2%) as the fund holds SGX-listed companies whose operations are predominantly outside of Singapore such as Jardine Matheson, Hongkong Land, DFI Retail Group and Thai Beverage. It is also worth noting that the fund may invest in non-STI component stocks and equities listed outside of Singapore with similar characteristics to those of a dividend anchor or dividend grower.

Figure 2: Geographical breakdown of fund

Looking at the fund’s sectoral breakdown, it has the largest exposure in Financials (28.1%) and notable exposures in Industrials (20.3%) and Real Estate (19.8%) as of 31 March 2024. We note that it is not uncommon to see these sectors in a Singapore fund considering that they collectively form a large portion of the Singapore equity market.

Figure 3: Sectoral breakdown of fund

The fund holds significant positions in Singapore banks DBS (SGX: D05), UOB (SGX:U11), and OCBC (SGX: O39), which are valued for their strong balance sheets and attractive dividend yields.

The long-term growth prospects of Singaporean banks are bolstered by several factors. These include the potential for their expansion abroad, driven by their excess cash position. They might also consider acquiring other banks in Southeast Asia to broaden their customer base and stimulate further growth.

Furthermore, the banking sector is expected to benefit from foreign direct investments and the growing presence of family offices, which could boost the recovery of non-interest income and increase wealth management fees. Singapore's stable economy, highly educated workforce, supportive policies for family offices, and advantageous geographical location continue to attract more family offices. According to the 2023 Global Family Office Compensation Benchmark Report, over half of Asia's family offices could be based in Singapore, underscoring its appeal as a hub for such operations.

Beyond the banks, the fund is gradually rebuilding the portfolio’s exposure to the technology sector due to the bottoming of the technology inventory cycle and AI-driven demand. As a result of the integral role of semiconductors in the technology sector, they are also optimistic about the semiconductor sector, as reflected in one of its top positions, UMS Holdings (SGX:558) (2.7%) as of 31 March 2024.

Related article: UMS Holdings: A hidden opportunity to ride on Singapore’s semiconductor upcycle

The fund is also cautiously adding to REITs that have strong balance sheets and benefit from sound underlying demand such as logistics and data centres. It continues to like "New Singapore" stocks, which represent the future economy of Singapore, in areas such as renewable energy, technology, data, healthcare, food and logistics.

Table 1: Top ten holdings

Rank	Holding Name	Sector	Net Assets (%)
1	DBS	Financials	9.4%
2	OCBC	Financials	9.1%
3	UOB	Financials	8.3%
4	Singapore Telecommunications Limited	Information Technology	5.9%
5	Sembcorp Industries Limited	Utilities	5.3%
6	Keppel Limited	Industrials	4.8%
7	Singapore Technologies Engineering Limited	Information Technology	3.2%
8	CapitaLand Investment Limited	Real Estate	2.7%
9	UMS Holdings Limited	Information Technology	2.7%
10	Seatrium Limited	Industrials	2.7%
		Total	54.1%
Source: Nikko Asset Management., iFAST Compilations Data as of 31 March 2024

Although this fund has no benchmark, we use the Straits Times Index (STI) for performance comparison purposes. The fund’s dividend yield is higher at 5.89% compared to the STI’s 4.67% (as of 31 March 2024). One of the significant overweight positions compared to the index is in Sembcorp Industries, which has seen improved financial performance, increased dividends, and plans for expanding its renewable portfolio. The company aims to become a leading provider of solar and wind assets in Asia.

Relatively strong performance against its peers

Over the last decade, the fund has largely outperformed its actively managed peers with an assets under management of at least SGD 700 million, like the abrdn Singapore Equity and Schroder Singapore Trust, making it an attractive choice in the active investment space. The fund delivered a cumulative return of 46.40%, outstripping that of the abrdn Singapore Equity (38.69%) and Schroder Singapore Trust (40.96%).

Figure 4: Performance against peers

On the note of dividends, abrdn Singapore Equity and Schroder Singapore Trust distribute dividends quarterly but have no specified dividend target. Meanwhile, the Nikko AM Singapore Dividend Equity has a dividend target of 5% to 7% with monthly distributions. Over the 12-month period as of 31 March 2024, the Nikko AM Singapore Dividend Equity Fund delivered the highest dividend yield of 5.40% compared to its peers.

Figure 5: Dividend Yield against peers

Moreover, over the last five years, the fund has managed to demonstrate greater resilience in down markets, as illustrated by a lower maximum drawdown compared to its peers.

Figure 6: Nikko AM’s fund recorded the lowest maximum drawdown over the past five years compared to its peers

Final thoughts

All in all, we find investing in Singapore attractive due to its position as a key semiconductor hub and the broader economic recovery that may trigger a potential uptick in investor sentiment. This could lead to increased capital inflows, and in turn, trigger a re-rating in the equity market and drive valuations upwards.

For investors who want regular and predictable distributions, we recommend the Nikko AM Singapore Dividend Equity SGD. The fund invests in companies with sustainable dividend payouts, resilient business models, and proven management teams and has a strong performance track record.

Declaration:

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) and the analyst who produced this report hold a NIL position in the abovementioned securities.