To find good REITs, you need to evaluate the companies thoroughly, understand their business as well as aware of the market sentiment. To simplify the process, we summarize our REITs selection strategy (we managed to make a 25% returns year-till-date!) in two simple steps.
First, look for REITs which pay consistent or growing dividends historically.
Imagine you are an employee of a company, you would prefer the employer to pay you the agreed fixed salary (let's say $3,500), rather than paying you different amounts (let's say range from $1,500 to $4,000) every month. We want stability and predictable income in the long run. The keyword here is "consistent".
The same principle applies to REITs investing as well. Consistent dividend income is the main reason why we invest in REITs (if you are looking for high growth and high returns, REITs will not be something that is suitable for you). To achieve that, we want to invest in REITs that manage a quality portfolio, maintain good occupancy and able to collect rentals over time. This would lead to consistent dividend payout years after years. As REITs are regulated to pay out at least 90% of the distributable income, this makes dividend as one of the critical parameters on REITs evaluation.
Our REITs investing strategy prefers REITs that have at least five years of stable or growing distributable income per unit (DPU). While historical performance has no guarantee of future price movement, a REIT that maintained a strong track record is likely to continue to do so as compared to a REIT with choppy performance historically.
Take Mapletree Industrial Trust (MIT) for example, in 2012, the REIT has been growing it distributable income per unit (DPU) over five years. And it continued to grow its dividends in the next three years. If you had invested in MIT in 2012, you would have received a 15% dividend yield on cost and 20% capital gains.
Next, we will look at the portfolio risk.
While we actively look for REITs high dividend yield and growing DPU, we should also credit REITs' management who is actively controlling the portfolio risk. Some questions to ask on evaluating the portfolio risk:
Is the occupancy rate healthy?
What is the leverage of the REIT?
How much does the REIT pay for interest expenses?
Good news is Singapore REITs have been managed to maintain a high occupancy rate of above 90% on average and the MAS regulation requires Singapore REITs to maintain a leverage ratio of 45% or below.
When it comes to interest coverage (an indication on how "safe" the dividend is), our strategy would prefer at least five times coverage, to make sure there is sufficient margin of safety in case there is any change in interest rate.
How our REITs Insiders help to simply the process
With our REITs Numerical Scoring, you can immediately shortlist the top 10 REITs with consistent dividend payout and good portfolio ratings. The higher the ratings or the longer the BLUE bar, the better the REIT is.
REITs Numerical Scoring (Click on the Insider tab under the menu)
Next, we will examine the shortlisted REITs in more details. We would only want to enter the trade at the right price for the good REITs. Once we find a good REIT, we will calculate the fair value of the REIT. Preferably to buy the REIT at a price significantly less than that its fair value. One way is to look at the historical dividend yield or price to book ratio. Taking Mapletree Industrial Trust, for example, the REIT has a strong track in growing dividends and maintaining a low portfolio risk. But it is currently trading near its historical low dividend yield. This may indicate that the price could be overvalued or "expensive" due to the recent appreciation of share prices.
Mapletree Industrial Trust's REITs Ratings (Sub-menu under the Insider tab)
Referring to our REITs Insider Report, pick any REITs that you have shortlisted. Then, you can examine whether the REITs is currently trading above or below its fair price.
Last but not least, for REITs investors who are busy with daily job, you can also refer to our REITs Insider Portfolio, an all-in-one REITs portfolio from REIT picks to the leveraged portfolio that you need to be profitable.
REITs Portfolio's year-till-date performances
Year-till-date, we have made a profit of 25% vs Straits Times Index of 7.8%.
REITs Portfolio's year-till-date returns
Ready to get serious about a new income stream? Now's the time start investing in REITs that pay consistent dividends. With an effortless REITs portfolio, proprietary insider information and extensive support, our REITs Insider Bundle can help you to make it happens.