Corporate Action Strategy For REITs
Screenshot from EC World REIT homepage
Key Highlights:
EC World REIT and BHG Retail REIT are going Ex-Date next week
The indicative yields are 7.2% and 9% for BHG and EC World respectively
Does Corporate Action Play make sense for these two REITs?
Background:
EC World REIT is going Ex-date on 2nd Sep with a dividend per share of S$0.01547. This amount will translate to 2.12% of dividend return based on the current price of S$0.73. You can refer here for the key financial ratios.
Does corporate action play make sense for EC World REIT?
Corporate Action Play
A strategy to buy the stock before Ex-date, collect the dividends and sell off the shares after the Ex-date. The main objective is to capture the dividend returns, hoping that the price remains the same. However, in most of the time, the price will drop to a price, which is equivalent to the dividend amount on the Ex-date.
Let's look at the historical performance of trading EC World REITs using a simple corporate action strategy
Assumptions:
Buy the shares one day before Ex-date
Try to close the trade at entry price after Ex-date
Close the trade before the next dividend payout
With the assumptions stated above, below is the historical performance.
There were a total of 12 trades since the IPO, and the total dividend returns were 23.53%. 9 out of the 12 trades were closed at the entry points (neither profit nor losses) and an average holding period of 1.5 months. Three trades were closed at a loss before the next dividend payout with a total loss of 8.5%.
Thus, the net returns are 14.9%! Not a bad strategy with little effort of 4 trades a year on the counter.
Note: Brokerage fees and other trade-related charges are not taken into consideration.
Using our proprietary Corporate Action Strategy
The number of corporate action trades reduced to five trades (original was twelve trades). 4 out of 5 trades were profitable with both dividends and capital gains.
Total net returns were 18.9%!
Or 5% more profits, with fewer trades, less brokerage fees and a shorter holding period of less than one month on average!
Note: with the current volatility of EC World REIT, we will not take this upcoming corporate action trade.
BHG Retail REIT does not meet our requirements for the corporate action strategy.
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