Portfolio Construction - Stocks or Bonds?

It is always inspiring to look at Dividend Warrior's blog. No bullshit and basically he just show you his CDP statement. A lot of bloggers wouldn't be able to do that and half the time, you wonder if what they posted was true.

DW's portfolio comprise a diversified pool of REITs and blue chip stocks. Stable portfolio that generates a nice compounded return. Congratulations for reaching a new milestone! 👍


How about Mr. IPO's portfolio?

The way in which i constructed my portfolio over the last few years was different DW. I have previously blogged about the bond ladder in 2016 and i actually acted on it. 😂

Over the last 3 years, i have built up a bond portfolio that comprise investment-grade level bonds (not the Hyflux type) and as the bonds were of investment grade, I was able to finance new bonds using leverage. The bond portfolio generates annual income of around $65,000 (after deducting the interest expenses) and the levered return on my bond portfolio is around 8%. I will continue to add on to the bond ladder when i see quality bonds being launched. The downside of this bond portfolio is that it is majority in USD. As such, i am subject to foreign currency risk (unless i migrate to US when i retire).

Today, my portfolio comprise 73% investment-grade bonds and 17% stock and 10% cash. For the purpose of this chart, I only included the cash in my SRS bank account. 😎

Stocks portfolio

Now that i have built up a portfolio of bonds (which i will continue to add one more bond this year), I have also decided that it is time to take a more active approach towards my stock portfolio. On that note, i have fully divested my holdings in Netlink Trust from my SRS account (wifey still keep her portion). In addition, i have also divested Starhill REIT. 

These two counters have ran up in tandem with the rest of the REIT sector due to the benign interest rate outlook from the US and i have taken the chance to sell them. I will redeploy the cash that is "released" by Netlink and Starhill into other counters in due course. 

The selection criteria will fall into one of the 3 categories: "growth stock", "dividend stocks" or "REITs". I will likely be more focused on dividend-paying stocks as well as REITs. The stock portfolio is actually doing fine as well, generating a yield (on cost) of 6.95%. 

Passive income

Overall, the entire portfolio (less the two counters sold) generates $81,750 per year. You see some negative cash flows in Feb and Aug, as my loans are now rolled-over on a monthly basis. The current interest rate on my USD loans are around 3.3%. If you want a lower interest, it is cheaper to borrow in Euros or JPY, however, it will not match the underlying assets. I may switch to either currency when they strengthen against the USD. 

If you have read about my goal no.2 for 2019, it will be to hit $100,000 passive income per year. I will most likely achieve it when i buy another bond later this year. 

Conclusion

I have decided to use bonds to reach my passive income goal because at my stage of life, i want more "certainty of cash flow" and less volatility. Now that i have built up the bond portfolio to a decent size, i will relook into the stock portfolio and allocate more cash to build up that component as well. The stocks portfolio will likely be more "volatile" but i will stick to the more "blue chip" stocks. 

Happy SRS / Retirement planning.