The media has been churning out articles about an impending slowdown as the combination of high inflation and surging interest rates dampen consumer demand.
Furthermore, Prime Minister Lee Hsien Loong had warned during his May Day message last year that Singapore could face a potential recession either this year or the next.
Amid the uncertainty, should investors be fearful? What can you do to fortify your investment portfolio?
Bracing for an economic storm
Indeed, the numerous projections for the global and local economy seem to point to an impending economic storm.
To make things worse, interest rates are still poised to rise this year, even after they have risen faster than at any other time in recent history.
The US Federal Reserve’s resolve to bring the inflation rate down means that the officials there will continue to hike rates until it achieves a modicum of success, as measured by the slowing and gradual decline in the inflation rate there.
These moves are generating storm clouds over the global horizon as consumers and businesses grapple with higher expenses and surging finance costs.
In other words, heavy rains, coupled with thunder and lightning, seem inevitable as monetary tightening grips the economy in a tight vice and people hunker down to wait for this storm to pass.
Dividends as a safe harbour
Amid the chaos, you may wonder how your investment portfolio will fare.
Some investors may feel worried as lower demand for goods and services will crimp profits and cash flow for businesses, resulting in lower share prices as pessimism abounds.
Dividends, however, can act as a safe harbour from this storm and help you to navigate it successfully.
Businesses that can maintain or even increase their dividends provide a hint of their underlying strength and resilience.
Recession-resistant companies such as integrated healthcare player Raffles Medical Group (SGX: BSL) and retailer Sheng Siong Group Ltd (SGX: OV8) can continue to pay out consistent dividends.
Local banks such as DBS Group (SGX: D05) and United Overseas Bank Ltd (SGX: U11), as well as bourse operator Singapore Exchange Limited (SGX: S68), have also kept their dividends constant.
The great thing about dividends is that they represent a tangible return on your investment that goes straight into your bank account.
This passive inflow of cash helps you to tide over the storm as you wait for the eventual recovery.
Faith of the heart
It’s also important to remember that storms don’t last forever.
Yes, the rain may be intense and the seas choppy, but eventually, the sun will come out again and the waters will calm down.
As investors, we can look forward to better days ahead knowing that such economic events don’t last forever.
Famous singer Rod Stewart has a song titled “Faith of the Heart”, and a lyric in that song states that says “no one’s gonna bend or break me”.
We should derive inspiration from the song and feel confident that declining markets will not “bend or break” us.
After all, if you park your money in strong and well-managed companies that pay out consistent dividends, you have nothing to worry about.
Compounding your way to retirement
Dividends have one added advantage, too.
By building up a resilient dividend stream, you can slowly but surely compound your wealth for your retirement.
For instance, if you receive S$1,000 a year in dividends, you can choose to reinvest maybe half of it, or S$500, into the same selection of stocks that paid you these dividends.
The following year, you should receive a higher amount of dividends as you will own more of the stocks that pay out these dividends.
And if you continue to pump money into your portfolio and rinse and repeat this process, you’d end up with a sizable nest egg in the years and decades to come.
Hence, dividends not only see you through a wild storm but are also useful for providing a cushion of cash flow to tide you through your golden years.
Disclaimer: Royston Yang owns shares of DBS Group, Singapore Exchange and Raffles Medical Group.