Income Focused Investing Strategy Is Akin To Stock Picking And Risky- Stick with S&P500 Instead for Average of 10%+ Annual Return.

Many Singaporean investors love SGX listed companies for their relatively higher dividend yield compared to other stock markets. However, this is just stock picking or worst still, a form of gambling. Look at those long term income investors who were holding on to Singapore Press Holdings and Sembcorp Marine- these investments ended up in disaster and tears for many of them. Most people do not do well picking individual stocks. There is just not enough diversification for retail investors to do stock picking themselves unless one buys 50 over stocks in one's portfolio basket. Buying index-fund such as S&P 500 is a safer bet and superior in returns as compared to adopting the so called income-focused investment strategy to grow your wealth. S&P 500 will never be zero in valuation given its components being made up of 500 great US companies unlike individual stock picking which can lead to total loss of your investment capital. 

Well, the above were actually summarised points that I gathered from a local You-Tube investment channel. I have great respect for the man and subscribed to his channel. In spite of that, I only agree with 50% of the points being made. The main contention which I have is that the income focused investing is vastly different from a capital growth focused approach. It is like trying to compare apples and oranges. Let me elaborate a few points on the main differences.

1.  It is a fallacy to assume that one can always sell the S&P500 at an optimum price whenever one needs cash hence this is nothing similar to the income focused approach.
I hope I can simplify this to try to articulate out the essence of what I am trying to express here. Basically, the dividends focused strategy allows one to have access to consistent cash distribution from the business which is more related to business fundamentals rather than the vagaries of market pricing like the S&P500. The stock market is a weighing machine in the long run no doubt but during short-term period, it can lead to grave mispricing depending on market sentiment of the day. For example, the S&P500 dropped more than 20% this year while income distribution this year from SGX banks and REITs held steady if not increased more. So if one sold off some units in his/her S&P500 to raise much needed cash at this juncture, he/she automatically gets a 20% cut in "distribution".  Also, who the hell knows when is the best time during the year to time the market to sell off his/her S&P 500 units?

(Note: The only times so far that I encountered a massive breakdown in the income thesis is during the 2008 global financial crisis and the recent COVID-19 lock down. For the latter instance, Hospitality REITs and retail REITs were severely affected. But industrial REITs were relatively still holding up well albeit some decrease in distributions which were being held as reserve for working capital.) 

2. Some people need regular cash distribution for retirement, critical illnesses or when one is facing retrenchment- disposing S&P 500 units to raise such cash is not ideal.

It is easier and more convenient to get cash distributions automatically rather than having to manually trigger off the process to sell part off one's S&P500 units frequently. Again, I have to point out that the needs of every individuals are different from one another. The "forced distribution" from income focused approach is thus more practical for myself personally. It also allows oneself to choose what to do with the money from the dividends such as keeping it for future investment during market crashes, re-investing it into other stocks, re-investing it into same stock, paying off living expenses, repaying margin loan, or repaying housing mortgages etc. 

3. Most income focused investors practise diversification of their investments.

The S&P500 is praised widely for its vast diversification into 500 great US companies. While such level of diversification typically can never be achieved by retail investors on an individual basis, the big question is why would anyone need to have 500 US companies in one's portfolio just for safety? Let there be no mistake that even with a basket of 500 stocks in S&P500, it is still an index fund that is equity in nature and does not guarantee 100% capital protection at any juncture when one choose to exit this index investment.

For many income focused investors, holding on to 15-20 or even more companies already ensures sufficient diversification to recover from total bankruptcy or forced liquidation of some of their individual investment. 

Summary

Personally, I do not think that the S&P500 ticks every investor's checklist for their own needs. I also do not think that it is comparable between an income focused strategy and capital growth focused approach. It is like the Lord Of the Rings whereby the S&P500 became the One Ring to rule all. Saying that, I have personally invested part of my CPF Ordinary funds (S$25K in different tranches) into the S&P 500 when it was hovering in the 3700-3900 range after the recent US stock market crash of 20%. I will also be adding cash into the S&P 500 as part of my capital growth investing. However, the bulk of my portfolio is still geared towards the income investing strategy which had worked well for me over the years.