19 October 2018

Lifetime income: Dividend stocks or public annuities?

Hong Kong has announced plans to launch a public annuity scheme through the government-owned Hong Kong Mortgage Corporation (HKMC). If you are planning for retirement, you will now face a fresh dilemma: Should you opt for high-dividend stocks or annuity schemes?

Comparison of High-dividend stocks and public annuities (See TABLE 1)  

When assessing annuity schemes, one key factor is the type of payout — whether it is a fixed sum or variable. Hong Kong’s proposed annuity scheme offers a fixed monthly payment to buyers and is expected to yield an internal rate of return of around 3-4 percent, along with principal protection of 105 percent of the premium paid.

Meanwhile, investors who opt for high-dividend stocks could earn more as a result of dividend growth and stock price appreciation. Such returns are, however, not guaranteed and the possibility of investment loss is always there.

Let’s take a look at some of the high-yield stock choices. (TABLE 2)

Some of them recorded continuous dividend growth over the past five years.

Take Link REIT (00823.HK) as an example. (TABLE 3)

If you invested HK$1 million in the stock and held on to it for past 10 years (2007–2016), total gain (including price gain and dividends) would be HK$2.12 million, with the annualized rate of return at 12 percent.

But there is no guarantee that future dividends will increase, and one must also remember that all investments in stocks bear the risk of loss.

The table at the bottom shows the return on investing in HSBC (00005.HK) for the same period. (TABLE 4) 

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Read more:

6 things you need to know about the public annuity scheme


EJ Insight writer

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