It’s good news to know that the world has finally put the pandemic behind it.
Borders are reopening and people are travelling once again as tourism experiences a sharp rebound.
Despite the feel-good sentiment, new worries have emerged in the past year.
Inflation has reared its ugly head and surged in the past year, hitting close to a 14-year high of 5.5% as of February 2023.
Because of this persistently-high inflation, the US Federal Reserve has hiked interest rates to between 4.75% and 5%, the highest since 2007.
Financial experts have also warned that Singapore’s economy could go into a technical recession in the first half of this year, defined as two consecutive quarters of negative quarter on quarter GDP growth.
Recessions are naturally a worrying phenomenon as it means that companies may shed jobs and hiring may slow down significantly.
With this trio of problems, it’s natural for you to wonder if you can ever enjoy a comfortable retirement.
A cost-of-living crisis
Understandably, inflation and higher interest rates exacerbate the cost-of-living crisis that many are facing.
My bowl of prawn dumpling noodles has seen its price jump up 25% from S$4 to S$5 earlier this year.
A cup of tea now costs around S$1.30 on average, up 30% from S$1 during the pandemic.
Higher interest rates also affect mortgage repayments as borrowers need to fork out more to service their loans.
The increase in the cost of goods and services, along with higher loan repayments, looks set to take a large bite out of your salary than ever before.
Punching inflation in the gut
All is not lost, though.
Do not despair because investing can help to alleviate the problems above and help put you firmly back on the road to an idyllic retirement.
By parking your money in strong, well-managed companies, you can face up to inflation and give it a hard punch in the belly.
There are ample examples out there of businesses that have returned much more than the prevailing inflation rate.
Technology giant Apple (NASDAQ: AAPL) has seen its share price surge from US$41.43 back in April 2018 to US$165.23 at present.
The compound annual growth rate (CAGR), excluding dividends, stands at an impressive 32%.
Tractor Supply Company (NASDAQ: TSCO), displayed a similarly-impressive CAGR of 32% over the same period.
Tesla (NASDAQ: TSLA), the famous electric vehicle company, did even better with a 57.4% CAGR over the past five years.
These businesses have grown tremendously despite the volatility roiling stock markets and can easily help you to beat inflation by a wide margin.
Creating a stream of passive income
With higher levels of expenses and loan repayments, it’s helpful to tap into a stream of passive income that can help to supplement your day job.
And the best way to do so is to invest in dividend-paying stocks and REITs.
REITs are well-known for being dependable dividend payers as they need to pay out 90% of their earnings to qualify for tax concessions.
You should choose solid REITs with great track records and strong sponsors that can weather tough times and continue to dole out distributions.
Some examples include Mapletree Logistics Trust (SGX: M44U) and Frasers Logistics & Commercial Trust (SGX: BUOU).
The former boasts a trailing 12-month distribution yield of 5.1% while the latter’s historical distribution yield stands at 5.8%.
Note that these yields are both higher than fixed-rate home loans of around 4.3% from DBS Group (SGX: D05) and OCBC Ltd (SGX: O39).
Ironically, both DBS and OCBC also possess trailing dividend yields of 6.1% and 5.3%, respectively, making them great blue-chip candidates for generating a predictable stream of dividends.
Get Smart: Compounding is the key
Of course, the key to enjoying a fuss-free retirement is not just in buying these stocks, but also in having the patience to compound your wealth.
Compounding is a slow but steady process of reinvesting your dividends to generate even more dividends.
You can easily do so by purchasing more of the stocks that pay out these dividends.
Compounding is also possible through growth stocks if you re-allocate your dividends by buying more of them.
Over time, as their share prices rise in line with business growth, you’ll have a comfortable nest egg with which you can retire on.
Not sure where to park your money in 2023? Give dividend stocks a try. You don’t need a lot of capital to start a stream of passive income. Our latest guide will show you how to invest and where to find the juicy dividends in SGX. Click here to download the report for FREE.
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Disclosure: Royston Yang owns shares of Apple, DBS Group, Tractor Supply Company and Frasers Logistics & Commercial Trust.
