Receiving S$10,000 is easy, but deciding what to do with it may not.
A luxury getaway would feel great for most people.
So is a splurge on the latest shiny gadget, such as the latest AI-powered PCs.
But here’s the thing: your future net worth lies in the investment decisions your present self makes.
For the Singaporean investor, it probably boils down to deciding between two investment buckets: Cash-Generating Singapore REITs (S-REITs) and US Growth Equities.
Cash Flow Bucket
Cash is “king”, at least for passive income investors.
S-REITs, with their legal obligation to pay out at least 90% of taxable income to investors, provide income-focused investors with regular payouts of cold hard cash into their accounts.
These payouts are mostly in the Singapore dollar, implying minimal currency risks for Singaporean investors.
To sweeten the deal, they are entirely tax-free for retail investors.
Asset Growth Bucket
If cash is king, growth, in my opinion, is arguably the “queen”; and this is what investors can expect from US growth equities.
Although high-growth US companies don’t generally pay attractive dividends, they offer unmatched growth opportunities by reinvesting nearly all their earnings into their businesses to spur innovation and expand globally.
Hence, rather than being fixated on their low dividend payout, investors should bet on their potential for massive capital gains that render inflation insignificant in the long run.
However, there’s a catch.
The US estate tax applies when you pass away – 40% of everything above US$60,000 in US holdings goes to the US government.
A 30% withholding tax also applies to dividends from US equities, although as discussed above, dividends are not the main dish when it comes to high-growth US companies.
Still, portfolios with a good mix of both buckets could make your money pay you adequately now, while also benefiting from favourable future returns.
Portfolio 1: Income-Focused (70% S-REITs / 30% US Growth)
For the impatient investor who wants a sizable paycheck right now, S$7,000 could be allocated to stable dividend champions such as Parkway Life REIT SGX: C2PU) and CapitaLand Integrated Commercial Trust (SGX: C38U).
A smaller amount of S$3,000 could be in Ireland-domiciled ETFs such as the iShares Core S&P 500 UCITS ETF (LSE: CSPX) that track the growth of the US S&P 500 index.
By holding Irish-domiciled ETFs, investors can reduce their withholding tax to 15% and dodge the US estate tax.
With a majority holding in stable S-REITs combined with minor exposure to the US market, investors enjoy lower volatility while getting the benefit of immediate cash payouts.
However, downsides exist.
Aside from growth being comparatively slower, since REITs are significantly leveraged, risks of higher interest rates should not be ignored.
Portfolio 2: Growth-Focused (70% US Growth / 30% S-REITs)
For the younger investor, time is your greatest weapon to reap the benefits of long-term compounding growth.
With the timeframe to stomach the volatility of the US market, you just need a small S$3,000 in REIT holdings such as Keppel DC REIT (SGX: AJBU), while the remaining stays in high-growth US stocks such as NVIDIA (NASDAQ: NVDA) and Alphabet (NASDAQ: GOOGL).
Not only does Keppel DC REIT offer stability as a REIT, with its portfolio of AI-related data centres, it also offers exposure to the secular growth potential of AI infrastructure buildout.
With a majority holding in highly volatile US stocks, the risks associated with deep “paper losses” are high, especially during market crashes, but so is the potential for exponential growth.
Portfolio 3: Is It Too Much to Ask for Both? (50/50 Split)
You are looking at two pairs of shoes – a lightweight version optimised for speed, and a well-cushioned version optimised for stability.
As both are useful in different situations, you decide to invest equally in both.
Why not apply the same thought process to your portfolio?
With S-REITs and US equities being historically uncorrelated, an equal mix of both could result in the most resilient strategy.
While US stocks suffer an occasional meltdown, local REITs – with their cash payouts anchored by local occupancies – are expected to hold the line.
To turbo-charge your returns, use your tax-free S-REIT returns to buy US stocks while they are selling cheap during a meltdown.
Imagine this – using the money derived from the rising rental rates of Singapore properties to own a larger stake in future global growth anchored by high-growth US companies – the smartest way to fund tomorrow’s upside using today’s income.
Get Smart: Choose Your Cash Machines Wisely
There are no wrong choices, just those that your future self will thank you for.
Can’t even pay your bills? Lean towards REITs.
Pursuing a sizable net worth to gain “Financial Independence and Retire Early” (FIRE)? Go heavy on high-growth US equities.
Good investment habits are built over time.
Build the discipline to regularly invest your future bonuses, turning your one-time windfall into a lifetime compounding machine that works towards your financial goals.
Many Singapore stocks fall behind inflation, which means your money quietly loses strength over time. Dividend stocks have a very different track record. Some continued delivering 6% to 13% every year across the toughest market conditions.
In this FREE report, discover 5 crisis-tested dividend stocks that kept rewarding investors while the market struggled. Download your dividend investing guide now.
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Disclaimer: Larry L. owns shares of Keppel DC REIT, Parkway Life REIT, CapitaLand Integrated Commercial Trust, Nvidia and Alphabet
