It is well known that the Central Provident Fund (CPF) ordinary account (OA) offers an interest rate of 2.5%.
But there are blue-chip companies that can offer better yields.
Savings and more …
The CPF system was set up by the government decades ago as a method of “forced savings”. It has evolved over the years and is now widely recognised as a tool for building up retirement savings.
The primary function of CPF is to help you to grow their savings in an almost risk-free manner.
But the CPF OA also offers some flexibility.
As it stands, all OA funds will automatically earn an interest rate of 2.5% per annum, almost risk-free.
However, the monies can also be used for a variety of purposes such as education, property and even to invest in a wide range of investments such as Singapore Savings Bonds, unit trusts and individual equities.
Let’s focus here on the investment aspect, as there are blue-chip companies that might be worth considering as they offer dividend yields that are above 2.5%.
I would like to highlight three blue chip companies today.
DBS Group Holdings Limited (SGX: D05) is a household name that every Singaporean should know, as it also includes the Post Office Savings Bank (POSB) under its umbrella.
Being one of Singapore’s three big banks, DBS Group offers a wide range of banking services to both individuals and corporations.
Headed by CEO Piyush Gupta, the group has performed well over the years and grown both its total revenue and net profit by impressive amounts.
In its recent 2019 third-quarter earnings, DBS Group saw its total revenue increase by 13% year-on-year to hit a new high of S$3.8 billion, while profit before allowances jumped 17% year-on-year to S$2.2 billion, also a new record high.
For investors, the group has declared a quarterly dividend of S$0.30 per share, adding up to a trailing 12-month dividend of S$1.20 per share.
At the last traded share price of S$25.56, DBS shares are yielding around 4.7%.
Singapore Exchange Limited (SGX: S68), or SGX, is Singapore’s sole stock exchange. The bourse is a platform for the buying and selling of a wide variety of securities such as equities, fixed income (bonds), derivatives, options and currencies.
As SGX is the only stock exchange operator in Singapore, it enjoys a monopolistic position and, therefore, has a very strong competitive moat.
SGX is growing its derivatives division to cater to demand from investors for portfolio management solutions and risk hedging strategies.
The bourse reported a strong 2020 first-quarter result with revenue rising 19% year-on-year to S$248 million and net profit jumping 25% year-on-year to S$114 million.
SGX has declared an interim quarterly dividend of S$0.075 per share.
At the last traded price of around S$8.96, SGX shares are offering a decent dividend yield of around 3.3%.
SATS Limited (SGX: S58) is a leading provider of both gateway solutions (for airlines) and food solutions.
Food solutions include airline catering for airlines such as Singapore Airlines (SGX: C6L) and Cathay Pacific, and the division also runs central kitchens that supply a wide variety of food items to leading restaurant chains such as Haidilao and Yum! China.
Gateway services include ramp and baggage handling and airfreight handling.
SATS’ growth over the years has been powered by the expansion of Terminal 4 at Changi Airport, in tandem with growing tourist numbers from China, Japan, India, and Indonesia.
That said, SATS’s fiscal 2020 second-quarter results were mixed, seeing revenue increasing by 9.8% year-on-year but net profit falling by 7.6% year-on-year.
The profit decline was due to increased expenses relating to the consolidation of entities Ground Team Red.
On the flip side, operational metrics for the first half of fiscal 2020, except for cargo handled, had improved. The group declared an interim dividend of S$0.06 per share which adds up to a trailing 12-month dividend of S$0.19 per share.
At SATS’s last traded price of S$5.10, shares offer a dividend yield of around 3.7%.
Get Smart: Risk and reward
The CPF OA’s 2.5% does not sound like a lot but with the Singapore government’s backing, the returns are almost guaranteed. The capital used to generate the yield is also protected.
Buying into a blue-chip company can offers yields that are higher, but it comes with higher risk.
On balance, investors that are interested in getting better returns will have to decide on how to allocate their CPF funds between OA and stocks to get the returns they want, at the risk that they are comfortable with.
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None of the information in this article can be constituted as financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life. Disclosure: Royston Yang owns shares of SATS and Singapore Exchange.