The last three years have shown how a little patience can do wonders for your stock portfolio.
Back in March 2020, the Citibank research team downgraded DBS Group Holdings Ltd (SGX: D05) to “SELL”, saying that shares are worth a mere S$17.50.
Following the downgrade, shares of the local bank did indeed close below the S$17.50 mark.
For a single day, that is.
Following that fateful day, DBS Group shares have mostly been on the uptrend.
But the target price saga was far from over.
Curiously, as share prices rose, the same research team started to adjust its target price.
By June 2020, just three months after tagging DBS Group to be worth S$17.50, the target price was revised upwards to S$25.50.
To top it off, DBS Group shares turned from a “SELL” to a “BUY”, with the value of the shares supposedly increasing by almost 46% in a matter of months.
As of 31 August 2023, around 3.5 years later, shares of Singapore’s largest bank are trading at over S$33.30.
Everyone’s guessing, some of us have fancier math
Yet, the burning question remains.
How is it that DBS Group can be worth a mere S$17.50 in March 2020 …
… only be adjusted to S$25.50 just three months later?
The answer lies in the assumptions that are fed into the calculation.
In March 2020, Citibank research said that short-term Federal interest rates would be reduced to zero and remain low for the rest of 2020.
That was the version of the future entered into the calculation of the target price.
Three months later, in June 2020, Citibank cited US economic research that new developments had led them to believe that the earlier forecasts were too pessimistic.
And by inputting another version of the future — viola, you get a higher target price of S$25.50.
The sequence of events should inform you that the target price of a stock can change according to what you think the future will be.
In other words, behind all the high-sounding language and complicated math …
Everyone’s just guessing what the future will be.
Taking a different, simpler approach
At The Smart Dividend Portfolio, we took a different tack.
Instead of engaging in the vagaries of target price setting, we opted for something much simpler: patience.
Our timing for buying shares of DBS Group was not perfect …
… we bought shares in April 2020.
We did not manage to get the lowest possible price either …
… we got shares at around S$19.34.
BUT here’s the difference: we were PATIENT.
Despite all the bad news swirling around the bank back then, we believe the situation was going to be temporary.
At our buy price of S$19.34, we paid roughly a one time book value for DBS Group shares.
At that valuation, we felt that the odds of a good outcome were tilted in our favour.
What’s more, we were going to be paid dividends as we waited for the effects of the pandemic to blow over.
As of today, we have collected S$4.97 per share in dividends from DBS Group.
Dividends are money in your pocket to spend however you please.
And with shares at S$33.30, the Smart Dividend Portfolio has recorded total returns of almost 100%, including dividends received.
Not bad for doing nothing while the stock rewards us over 3.5 years.
BUT wait, there could be more in the future.
You see, DBS Group has just raised its 2023 second-quarter interim dividend by over 33% compared to a year ago.
In short, we’re getting even more dividends in the future.
As a cherry on top, DBS Group is not the only one delivering such pleasing increases.
Over the past year, the Smart Dividend Portfolio has ANOTHER three stocks that have hiked their dividends by over 33%, almost 43%, and 36% respectively.
Now that’s something that bonds don’t do for you.
It’s enough to put a smile on any income investor’s face.
Get Smart: Your final answer
Investing doesn’t have to be difficult.
Investing does not require you to be an economist or a math genius.
And thank goodness, investing does not require you to perfectly time your entry for a stock.
Otherwise, there would only be one day where you could get DBS Group shares below S$17.50.
However, good investing does require one thing: patience.
We did not time our entry perfectly. We did not get the lowest possible price either.
Did it matter in the end?
Well, I have yet to see an investor who is sad with a near-100% return over this period.
As such, I would argue that target prices do not matter as much as most investors imagine.
So long as you have a good understanding of valuation and with that, tilt the odds to your favour, I submit that you will stand a far better chance of coming out on top in the future.
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Disclosure: Chin Hui Leong owns shares of DBS Group.
