A Yield Shield Portfolio for 2020

A Yield Shield Portfolio for 2020

We cannot always choose when to retire. And even if we choose, few will choose to do so when the financial markets are at rock bottom, because that would mean that we might not have saved enough for retirement. But to retire at the peak of the financial markets leaves us vulnerable to the risk that a bad financial markets crash will leave us with no income and too little assets left to retire on. How can we structure a portfolio to protect us from this? Backtests have shown that a Yield Shield portfolio may work. But backtests are history and no indication of the future. The only way to find out is to build such a Yield Shield portfolio for 2020 today and see how it works over time.


Previously, we explore using the 4% rule for a portfolio of stocks and bonds for retirement here and here. The results aren’t reassuring, due to high volatility and low returns on stocks in Singapore over the past 2 decades. We also explore how a Yield Shield portfolio, named for the high dividend blue chip stocks it comprises, can work in Singapore, overcoming Sequence of Returns Risk. This works especially well with an annuity, guaranteeing that we will not run out of funds in retirement.

Let’s rewind for a moment to understand why the 4% withdrawal rule may not work and how the Yield Shield may. Unlike the process of accumulation, when someone with a long investment horizon can ride out the ups and downs of the stock market (like the Asian Crisis, Global Financial Crisis, and maybe even the COVID-19 Crisis), a retiree decumulating neither has a very long horizon, nor a source of income to tide him or her over periods of market weakness and turbulence.

In fact, decumulation using the 4% rule is like doing Dollar Cost Averaging in reverse. Since 4% of the initial portfolio is withdrawn every year, you have to sell more shares when prices are low. This sounds a lot like “sell low buy high”! So running into market turbulence at the start of retirement means that the portfolio will deplete too quickly to last for another 25 to 30 years.

How does a Yield Shield Portfolio help?

So this is where the Yield Shield comes in. If the portfolio has a high dividend yield, say 4.5%, the retiree can simply withdraw the 4% from dividends alone. This leaves the shares in the portfolio untouched, allowing the portfolio to regain its value when the market recovers.

But can’t we do the same with a portfolio of bonds instead? Unfortunately no. While bond coupons will provide a more stable source of income than dividends, they do not grow over time. This is a requirement, in order to beat beat inflation over the 25 to 30 year retirement period. Remember that inflation for retirees is likely to be higher than the average level of inflation. This is because there will be a growing shift of consumption in retirement to services such as healthcare (which increase in price with economic growth and rising wages) and away from manufactures such as consumer electronics (which fall over time due to productivity gains).

Now, this focus on the Yield Shield as a retirement portfolio strategy may seem hopelessly out of date. The FIRE movement in the US has focused on total returns rather than dividends, and research there has also shown that it did not work during the 2008 Global Financial Crisis. But this is market specific, as the dividend yield on the S&P500 has never been higher than 3.5% since 1991. In fact, the years between 1960 and 1980 when the most instances of the failure of the 4% rule occur are not just high inflation years. They are also years when the dividend yield on the S&P500 did not break 3.5% either.

In Singapore by contrast, the dividend yield on the Straits Times Index (STI) has been rising over the years. For 2019, the total return on the STI was 9.4%, of which half was capital gain, and half was in dividends! So what might not work elsewhere has a good shot of succeeding in Singapore. Across global markets in the last 20 years, dividends have played an important role in total returns, as we show in Do Dividends Matter in Investing?

A Yield Shield Portfolio for 2020

To test our faith in use of the Yield Shield Portfolio for retirement, we shall set up a new Yield Shield Portfolio at the beginning of March 2020 with the aim of withdrawing 4% of the portfolio’s initial value every year, adjusting for inflation of 2%. Yearly withdrawals from the portfolio start at $4 per $100 invested per year, or $0.33 per month per $100 invested.

Given the COVID-19 virus outbreaks, it may not be the most opportune time to buy stocks. But it is a good chance to test whether this portfolio will survive market turbulence and Sequence of Returns Risk. Of course, the jury won’t be out for many more years. However, at the very least, we will be able to learn something useful along the way. In the future, we will create more Yield Shield portfolios, as a test of whether the Yield Shield will be equally effective at different points in the stock market cycle.

The Yield Shield portfolio which we backtest for our previous post is below:

Yield Shield 2008

Stock NamePrice 1 Jan 2008Price 1 Aug 2019Dividends paid
Ascendas REIT$2.15$3.06$1.68
Capital Mall Trust$2.42$2.60$1.22
Capital Commercial Trust$1.47$2.05$1.02
Frasers Logistics Trust$0.85$1.50$0.88
Parkway Life REIT$1.12$3.08$1.21
SingTel$3.65$3.35$1.86
DBS$17.38$26.25$8.13
Venture Corp$10.20$14.60$6.40
SGX$9.6$7.89$3.35
Comfort Delgro$1.56$2.64$0.86
Keppel Corp$9.94$6.00$4.10

Performance of the 2008 Yield Shield Portfolio 2008 – 2019

Yield Shield Portfolio 2008

The Yield Shield Portfolio 2020 will differ from the 2008 edition, but the same principles for its construction will apply:

  1. As the biggest danger of the Yield Shield is the survival of the companies behind the stocks over the long term (25 to 30 years), the stocks will be selected from the blue chip components of the STI and the reserve list (total of 35 stocks). While size is not an indicator of good returns, it does correlate well with long term survival and remoteness form bankruptcy, which destroys the value in the portfolio faster than any market downturn.
  2. To hedge against foreign exchange risk, only stocks which have their core business in Singapore, and are SGD denominated, qualify. This eliminates the foreign stocks in the STI such as Wilmar, YZJ, HK Land, Diary Farm, ThaiBev, JMH and JSH.
  3. To ensure a high enough dividend yield, the weighting of REITs and Business Trusts is 50% of the portfolio. This is considerably higher than the 22% weight in the STI for real estate related stocks.
  4. The remaining 50% weight of the portfolio will be distributed equally among the different industrial sectors chosen. This is to avoid over concentration in particular sectors, such as Banking and Finance, which command a 39% weight in the STI currently.
  5. Only 10 stocks will be selected, with approximately equal weights, so 5 REITs/Trusts and 5 stocks in total.

There are clearly many ways to choose a portfolio of dividend stocks. It can be at the cost of much more complexity and a larger burden of day-to-day management. What we are aiming for here is simplicity, transparency, ad ease of maintenance over the longer term. This is especially important in face of declining cognition and mental dexterity as we age in retirement.

The list of STI socks and sectors they belong to which we consider are:

STI Stocks and Reserve List

SectorStock3-year Dividend YieldForeign?
REITAscendas REIT4.91%
CapitaCommercial Trust4.28%
CapitaMall Trust4.59%
Mapletree Commercial Trust3.83%
Mapletree Logistic Trust4.15%
PropertyCapitaLand3.05%
City Developments1.66%
UOL2.02%
HK LandY
FinanceDBS5.04%
OCBC3.73%
UOB4.77%
SGX3.28%
TransportComfort Delgro4.83%
Jardine C&C3.57%
AirlinesSIA3.44%
SATS3.94%
TelcoSingTel5.52%
ShipyardKeppel3.56%
SembCorp2.44%
YZJY
MediaSPH6.50%
EngineeringST Engineering3.53%
Venture3.93%
LeisureGenting3.81%
F&BDiary FarmY
ThaiBevY
CommoditiesWilmarY
Multi SectorJMHY
JSHY
Reserve ListSuntec REIT5.06%
Mapletree Industrial REIT4.11%
Mapletree North AsiaY
Keppel REIT4.48%
NetLink Business Trust5.27%

From the list of stocks above, the ones picked for the Yield Shield portfolio for 2020 are:

Yield Shield 2020

SectorStockTrailing Dividend YieldPrice
REIT - IndustrialAscendas REIT5.01%$3.19
REIT - CommercialCapitaMall Trust4.59%$2.49
REIT - LogisticMapletree Logistic Trust4.29%$1.87
REIT - CommercialSuntec REIT5.44%$1.69
InfrastructureNetLink Business trust5.3%$1.01
FinanceDBS5.30%$24.10
TransportComfort Delgro5.33%$1.97
TelcoSingTel6.19%$2.99
EngineeringST Engineering3.46%$4.37
LeisureGenting4.09%$0.815

The average trailing dividend yield on this portfolio is 4.9%, with which we will draw 4% annually, adjusted for inflation of 2% per year. The selection of the stocks in this portfolio primarily considers the level and stability of the dividends. However, the final selection also considers the business model of the companies, and stocks in the media and air transport industries do not pass the filter. Note also that of every $100 put into the portfolio, we invest only about $98. The remaining $2 is held in cash to meet the scheduled monthly withdrawals ahead of the receipt of dividends. This 2% cash buffer (or 6 month’s worth of withdrawals) will be a feature throughout the life of the portfolio.

How will this Yield Shield portfolio 2020 fare?

A historical 12 year backtest of this portfolio starting from end 2007 (with 9 stocks, since NetLink was not listed until 2017) shows that it has a correlation of 90% with the STI. This means the volatility and risk is similar. The cumulative annual returns are 2.72% (excluding dividends), higher than the -0.89% for the STI. Like the 2008 Yield Shield portfolio, despite the 4% withdrawal every year and the loss of half its value in the first year, the portfolio survives and gains over time, ending up more than 40% higher than the starting value. These backtest results are largely similar regardless of rebalancing frequency of the portfolio. That is, whether it is rebalanced every month, every 2 months, every 6 months, annually, or even once every 2 years!

However, this comparison of returns is not really meaningful. The selection of the Yield Shield stocks already assumes knowledge of the survivors amongst the STI stocks over the past 12 years. This hindsight bias can be significant. The STI has had numerous casualties over the years, such as SembCorp Marine, SIA Engineering, Golden Agri, Starhub, Hutchinson Port Trust, Noble, NOL, and Cosco. Also, there are those which were delisted or had a drop in free float such as Olam, GLP and F&N. Hence, the Yield Shield portfolio 2020 is a true test, free of any foreknowledge or biases.

From the purchase prices of Yield Shield stocks above, it is clear that the portfolio already faces losses due to the current volatility in the markets due to the COVID-19 episode. But that’s alright! The portfolio is meant to roll with the punches of Sequence of Returns Risk, and yet come out stronger.

In addition to monitoring the progress of the Yield Shield portfolio, we will also benchmark it against 3 other portfolios. These three portfolios will also be subject to the same 4% withdrawal rules:

Concluding thoughts

We cannot usually choose when to retire. Even if we do, we might not do so when financial markets are at rock bottom, even though it gives the best chance of success. Retiring at the peak of the financial markets when we reach our target retirement investment amount is more common, but leaves us vulnerable to Sequence of Returns Risk, which can derail our retirement.

Backtests have shown that a Yield Shield portfolio may work. But backtests are history, and no firm indication of the future. The only way to find out is to build such a portfolio today and see how it works over time. Wish me luck in this period of COVID-19, crashing financial markets and uncertainty for the future!

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5 thoughts on “A Yield Shield Portfolio for 2020

  1. 1. Bonds allocation do play a role in a retiree portfolio for diversification & rebalancing (from risky assets).
    2. The Yield Shield portfolio has a high concentration risk (10%) to a single name and a high sector (property) concentration (50% reits). A retiree relatively low risk appetite/tolerance should not withstand high drawdown.
    3. Selecting stocks by highest dividend yield could be a dividend trap – other consideration such as dividend growth, profitability, quality factor should be considered.

    1. Thanks for the many good points raised!

      1) Traditionally, bonds have been used for diversification and risk reduction. But this comes at a price for a retiree portfolio – the inability to keep up with inflation, and trading off having a lower safe withdrawal rate which means that a lot more of the portfolio will be left unspent at the end of the day.
      2) Empirically, a portfolio of 10 equally weighted stocks replicates the volatility and drawdown profile for the index in question, even when considered across downturn years such as 2008
      3) Agree that we should not fall into a dividend trap, the stocks with the highest yields and the lowest price-to-books/earnings usually have more fundamental problems, so the aim is a forma portfolio of stocks with strong business models and select those with the highest dividend yields

      At the end of the day, portfolio management for retirees is a lot more complex than in the investing or accumulation phase – there is a need to keep up with inflation, there is a need to avoid running out of money, and there is a need to ensure not too much gets left over when they pass on. So much of the received wisdom for portfolio construction (which are really for infinitely lived investors who only have the aim of maximizing returns given a risk level) do not really apply directly.

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