What Should Singapore Investors Do When Interest Rates Decline?

Interest rates are officially on the decline for investors and savers. Last month, the US Federal Reserve made its first interest rate cut in over four years, signalling a clear trend: yields on “safe” assets are also set to decrease.

This trend is reflected in recent data. At the late September auction of 6-month Singapore Treasury bills, yields dropped to 2.97%—the lowest level in over two years.

So, what are the options for income-seeking investors in Singapore who wish to earn regular income in a falling-rate environment?

Read Also: 4 Ways Singaporeans Might Be Affected By US Federal Reserve’s Interest Rate Cut

Why Are Interest Rates Falling?

Understanding the current interest rate situation is essential. In short, the US economy—the world’s largest—seems to be weakening. Recent months have seen lower-than-expected jobs data, which led the Federal Reserve to implement its first rate cut in September. Combined with persistently low inflation, this data indicated that the Fed would likely start reducing rates this year.

And that’s exactly what happened. As Federal Reserve Chairman Jerome Powell stated in August at the central bank’s Jackson Hole policy gathering, “The time has come for policy to adjust.” Financial markets, as usual, had anticipated this move, and yields began declining even before Powell’s August speech.

With investors now expecting two more 25-basis-point (25bp) rate cuts from the Fed by year-end, it’s likely that rates will continue to fall into 2025. This situation presents a challenge for investors seeking reliable passive income.  What are the  alternatives for those focused on dividends and yields?

Dividend Stocks

Dividend-paying companies are consistently popular among investors because, when well managed, they can continue to increase their dividends each year—even in a declining interest rate environment.

However, investing in stocks involves greater risk than placing capital in Singapore T-bills or Singapore Dollar money market funds (MMFs). Despite this higher risk, dividends can significantly contribute to your overall investment returns.

In fact, numerous studies have shown that dividends can account for 40% to 57% of the long-term total returns in stock markets. In Singapore, the most prominent examples of appealing dividend stocks in a falling-rate environment are the “Big Three” banks: DBS Group (SGX: D05), OCBC (SGX: O39), and UOB (SGX: U11).

The dividend yields offered by the three major banks currently range between 5.2% and 5.7%, which is over 300 basis points higher than the latest yield from the 6-month Singapore Treasury bill.

Many professional investors believe that if interest rates are cut further—impacting banks’ net interest income (NII)—growth in their wealth management and lending activities (boosted by lower rates) could offset this decline in NII.

More generally, dividend stocks can continue paying and even increasing dividends during an economic downturn. If a recession hits the US, interest rates will likely drop further, making stable dividend stocks, such as blue-chip companies, even more attractive.

Read Also: DBS (D05); UOB (U11); OCBC (O39): Singapore Banks Dividend Yield And Share Price Performance

Real Estate Investment Trusts (REITs)

For Singapore investors seeking income, Real Estate Investment Trusts (REITs) are a compelling option. REITs tend to benefit from lower interest rates, as they rely on debt to fund their growth. With reduced funding costs, REITs can pass on more profits to unitholders through distributions (dividends).

Singapore REITs have already started to benefit from the expectation of falling interest rates. The i-Edge S-REIT Index surged by 14.7% in the third quarter of this year, marking its best quarterly performance since it was created in 2010.

Additionally, REITs offer attractive dividend yields of between 5% and 6%, much higher than those from T-bills or MMFs. However, while some REITs are maintaining or increasing their dividends, others are reducing theirs. This means investors should do their homework and be selective when purchasing individual REITs.

For those interested in REIT exchange-traded funds (ETFs), there are five available on the Singapore Exchange (SGX). These ETFs offer various dividend yields, ranging from 3.9% to 5.8%. The combined assets under management (AUM) for these five REIT ETFs reached a record high of just over S$1 billion as of 30 September 2024, underscoring their popularity among income-seeking investors in a declining interest rate environment.

5 REIT ETFs listed in Singapore

Sources: SGX, Bloomberg data as of 30 September 2024

CPF Top-Ups

There is also the safest option for yield. That comes in the form of just contributing to/topping up your Central Provident Fund (CPF) accounts, especially the CPF Special Account (CPF SA), CPF Medisave Account (CPF MA) and the CPF Retirement Account (CPF RA).

That’s because all three CPF accounts give you a guaranteed 4.05% per annum (p.a.) on your funds. Remember that beyond the mandatory contributions, you can also get tax relief on CPF top-ups at a maximum of $8,000 for yourself and an additional $8,000 for family members.

In total, the $16,000 in tax reliefs offer a solid incentive to top-up your various CPF accounts while also getting an above-average yield on those funds. The only “drawback” is that these funds are non-transferable once they have been moved into your CPF accounts. So, if you do need your funds – that earn a yield – to also be liquid then the CPF top-ups might not be suitable. Instead, investors can view CPF top-ups as contributing towards your retirement funds while also saving on income tax.

Looking For Yield In Singapore As Rates Fall

 In a declining interest rate environment, it’s unsurprising that yields on “safe” assets are also falling. Income-focused investors will need to accept some level of investment risk to achieve substantially higher passive income yields compared to instruments like T-bills.

Contributing to their CPF accounts can be an alternative for those who prefer not to take on additional investment risk to earn extra yield. However, it’s important to remember that CPF top-ups are irreversible, so this option should be approached with the understanding that these funds won’t be accessible until retirement.

Read Also: 4 Sectors In Singapore That Will Benefit The Most From The US Fed Rate Cut

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