A popular strategy for retail investors globally is to assemble a stock portfolio that pays dividends to you which cover all your expenditures in retirement. In theory it offers the potential to not have to stress as much about whether you need to sell your stocks.
Here I take a look how we could potentially apply this type of strategy specifically to the Vietnam stock market, and even using the dividend stream to spend retirement years in Vietnam.
Many investors have probably already come across key factors to think about when building a dividend portfolio for developed markets, so how might this differ for Vietnam?
We need to be mindful that you may run into a narrower field of options in terms of finding companies with a long record of dividend stability. This could mean achieving an ideal level of sector diversification is difficult. Historical factors to also bear in mind include even in the last decade Vietnam’s experiences of high inflation, companies facing borrowing difficulties, FX and overall economic volatility.
HOW TO BUILD A PORTFOLIO OF VIETNAM DIVIDEND STOCKS FOR PASSIVE INCOME
- Look at likely future dividends, avoid over reliance on historical data.
- Be well diversified in terms of sectors.
- Stick to larger companies with solid balance sheets.
- Look for conservative dividend payout ratios.
- Favour companies with pricing power.
- Plan a buffer for potential dividend cuts.
- Consider factors such as FX and taxes.
Look at likely future dividends, avoid over reliance on historical data.
A common trap for dividend investors more generally speaking, is to commence their search on a list of stocks that have the highest historical dividend yield. Quite often this throws up stocks that have declined in price over the last year, because the market rightly has caught on the likelihood of future declining earnings and dividend cuts.
I would start from a different frame of mind, thinking about what sectors and companies are experiencing improving fundamentals and free cash flow. Given the short-term setback of the Vietnam economy from covid-19, this also makes relying on what companies did with dividends in the last year as not such a great basis to forecast the future.
The post covid-19 outlook in Vietnam looks strong so companies might have also invested accordingly and could see dividends grow strongly from later in 2022 and onwards. Management might increasingly give specific guidance to dividend policies in the future once the economic uncertainty passes, so that is a key area to watch.
Be well diversified in terms of sectors.
If you analyse the Vietnam stock market from a sector perspective, it does lack some of the diversification we are used to in more developed markets. Here you need to make sure you are well diversified.
If you want to go back and take a quick look at some of the broader sector breakdowns, I covered that in this post of AN OVERVIEW OF THE VIETNAM STOCK MARKET – A ONE STOP GUIDE. – VIETNAM STOCK MARKET (vietnamesestockmarket.com).
There is a sizeable exposure to real estate and financials. If an economy does experience a boom bust scenario from a property boom then being too over exposed here could result in extreme volatility. About a decade ago Vietnam’s property market was still languishing, and banks took quite awhile to shake off concerns over bad debts and to adequately repair their balance sheets.
Stick to larger companies with solid balance sheets.
This is a good rule for dividend portfolios anywhere, but even more so in Vietnam. Currently the Vietnam stock market is enjoying a bullish 2021, so it might be easy for those with short memories to underestimate the advantage of a strong balance sheet.
If you think Vietnam is a one-way bet, note my broard OVERVIEW OF VIETNAM ECONOMY, HOW IT AFFECTS THE STOCK MARKET – VIETNAM STOCK MARKET (vietnamesestockmarket.com).
Also pay attention to the Risks of investing in the Vietnam stock market – VIETNAM STOCK MARKET (vietnamesestockmarket.com).
Put simply, a lot can still go wrong, and “frontier” stock markets and economies are more volatile. It is likely the larger companies with strong balance sheets and good access to funding can weather the storm and continue paying dividends.
Look for conservative dividend payout ratios.
Similarly to above how you want some buffer in the company’s balance sheet, you also want some buffer in terms of dividend payout ratios.
Another trap dividend investors can fall into is never paying attention to this metric. If you subscribe to the theory I just mentioned that Vietnam’s economy in the future might contain plenty of bumps like it has in the past, then this ratio is even more important to consider.
For those unaware I am simply referring to the percentage of earnings the company is paying out in dividends. Sometimes companies pay towards 100% of earnings out in dividends, which results in a high dividend yield and some investors buying on that basis alone. Obviously then if earnings slump the dividends are more likely to be cut severely. Investing in companies with dividend payout ratios closer to 50% might see the company maintain a steady dividend payment throughout some years of soft earnings.
Favour companies with pricing power.
A company might experience some great growth over a couple of years but depending on their line of business, this could attract a lot of competition.
Therefore a strong dividend based off some years of unsustainable performance could also be a trap to fall for.
Since the objective of most dividend investors is to accumulate a passive income stream to at least grow in line with their own costs of living, one should consider the company’s pricing power. As noted in the link on Vietnam’s economy earlier, Vietnam experienced inflation of well over 10% around 10-15 years ago.
For that reason, it can pay to search for infrastructure related or “hard” assets. Think of toll roads, airports, utilities, communications towers etc that often deliver fairly stable revenues linked to inflation. Usually long-life assets with high barriers of entry. As the Vietnam stock market develops further, we should see more of these type of opportunities present themselves.
Plan a buffer for potential dividend cuts.
I think it was Warren Buffett who spoke about how you must expect and be totally comfortable with the idea your stocks could be down 50%, otherwise don’t play the game to begin with.
Normally you would expect in general dividends to not show as much downside volatility to share prices. However checkout the huge drawdown in the Vietnam stock market in 2008. I think one should take this attitude from Buffett when it comes to investing in Vietnam stocks for dividends. Imagine that your dividends could easily be cut by half or more on your investment journey and plan accordingly.
Consider factors such as FX and taxes.
Home country bias can be a very subjective issue when it comes to assembling a dividend portfolio. Plenty of U.S. investors would have done perfectly well sticking 100% to their own market. This is helped by the fact that even then it is still likely they would hold various multi-national companies that themselves have a large amount of offshore revenues. Therefore they may not have to venture to offshore markets for diversification.
Personally I would argue even in that scenario a U.S. investor should hold some overseas shares as different global markets can experience very long periods being in and out of favour. I also think ideally one should diversify with the custody of one’s assets in different global jurisdictions. Having said that it is not so silly for a U.S. investor to only hold U.S. stocks. If they do that, at least it simplifies things in terms of the currencies of their investments matching where their cost of living is.
With someone retiring and living most of the year in Vietnam however, I think it would be far more riskier to only hold Vietnam stocks just to align that with where their expenditures are.
Whatever you decide though, just be mindful of this issue. If you are generating nearly all your dividend stream in a different currency from where you are living, it can at times result in significant changes to your real income coming in.
Dividend taxes and CGT in Vietnam for a retiree?
How can I live permanently in Vietnam? Does Vietnam have a retirement visa?
This is beyond the scope of this blog post anyway, as it would require a blog post within a blog post! I just wanted to flag these couple of factors as also relevant to this topic.
I will just note that unlike Thailand for example, Vietnam doesn’t have a specific retirement visa. Vietnam also this year cracked down on the issue of many staying very long term on tourist and / or “business” visas.
With the tax aspect (obviously I don’t provide financial or tax advice on this blog), it is still worth noting some things. Generally you are considered a tax resident of Vietnam if you spend more than half of a 12 month period there. Vietnam taxes worldwide taxable income of their tax residents. So note it is not like some nearby countries such as Singapore and Malaysia (no CGT) with regards to capital gains tax. Or in Thailand, where some expats can effectively avoid CGT from their foreign portfolio (a bit more complicated). Having said that as I understand things anyway, a Vietnam tax resident that makes personal capital gains on listed companies on the Vietnam stock market is treated well. Vietnam dividends by the way attract a 5% tax. The corporate rate there is 20%.
That’s about all I want to say there, just making the point one should not forget about other factors like this. Like I said though, seek your own professional advice if you are going down this rabbit hole in a serious way! Of course if you believe some of the points I made above might be incorrect please let me know in the comments area.
HOW TO RETIRE IN VIETNAM ON PASSIVE DIVIDEND INCOME FROM THE STOCK MARKET
In conclusion, I don’t think the Vietnam stock market has matured enough to expect to retire off a 100% portfolio of Vietnam dividend paying stocks. There isn’t enough of a wide choice of diversified blue chip style names that have built up a long record of consistent dividends in the past, and that also can reliably be expected to continue doing so. Factors such as stability of the local economy and corporate governance also need time to develop further.
However the fundamentals of the Vietnam stock market have improved rapidly over the last decade. Many companies are experiencing a very positive free cash flow outlook. This may mean for many investors looking to retire or experience a significant time in Vietnam, could consider allocating circa a fifth of their portfolio to Vietnam dividend paying stocks. It could offer some protection to their living costs in Vietnam. For example, if the Vietnam economy booms it could result in a rise in consumer prices as well as property prices. A well-chosen diversified group of Vietnam dividend paying stocks at least might perform very strongly in such an environment and help offset such rises in living costs.
Is Vietnam a good investment?
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