We believe that investing in dividend yield REITs is a great way to earn outsized returns. Why dividend REITs when so many gurus are buying growth, large-cap or tech stocks?
The reason is that REITs produce more consistent returns with limited downside risk, so investing them would yield better performance and gives you better sleep at night. But, why exactly do these REITs produce better returns? Let us walk you through the philosophy of investing in REITs. We'll also highlight a strategy that's proven particularly potent for small investors like you.
Why Investing In REITs?
There are so many different types of sectors available, and there are so many different approaches in investing (growth investing, value investing, dividend investing, sentiment investing ...), but focusing on the dividends is the simplest way. A good dividend stock is a company that pays a consistent dividend over time. A company that does well is likely to share the profits in the form of dividends with the shareholders. Even better, investors might potentially enjoy dividend growth in the long run.
The dividend yield is the company's dividends per share, divided by its latest share price. This number is continually changing as the price changes, which gives the investors an idea how much you getting in terms of dividends at the current price.
REITs, one of the popular sectors, have a unique business model that invests in real estates, manage the assets and collect rentals from the tenants. Based on the regulation, REITs are required to pay out at least 90% of its distributable income to enjoy tax benefits. Logically, this makes REITs, one of the best dividend machines in investing.
Is Dividend Stock Better Than Others
There have been various studies showed that dividend investing is likely to outperform the market in the long run. The research done by J. P. Morgan showed that dividend stocks also outperformed those stocks that do not pay dividends.
In the chart above, we see that if one had invested $1,000 for 25 years in high dividend yield and low payout ratio stocks, he would have enjoyed a 2500% total returns! That is 25 times the amount of money you could have returned!
Why REITs Outperform
With a limited land size in Singapore, properties are one of the most conservative assets to hedge against inflation or to build a long term wealth. Singapore property market has grown by more than 10 times or 1000% over the past 40 years!
REITs, with direct business exposure in properties, is a good asset class for investors who want to tap on the long term of the property market.
The first REIT listed in Singapore, Capitaland Mall Trust has returned more than 500% over the past 18 years!
Of Couse, REITs Are Not Completely Safe
Before you start investing in REITs, keep in mind that REIT investing is not always sunshine and rainbows. Especially during the financial crisis, REITs will definitely be impacted as well. In 2008-2009 Global Financial Crisis, we have seen REITs dropped by more than 60% of their values. The recent Covid-19 crisis has caused the Singapore REITs to drop by more than 50%!
Having said that, REITs are relatively more conservative than other asset classes as their balance sheets are asset-backed. In 2009, REITs quickly recovered from the downturn and enjoyed a good 12-year bull run.
Besides, REITs are very sensitive to the interest rate. In general, debt financing is essential to fund all asset acquisitions. Thus, the significant expense incurred by REITs is interest expenses. While there isn't any direct correlation between the REIT's share price and interest rate, but any increase in interest rate will potentially impact the distributable income.
Advanced REITs Investing Strategy - Double-Digit Yield
With the focus on picking REITs with strong fundamentals and consistent records in paying good dividends, you will notice that some of these REITs have been increasing their dividend payout since their IPOs. Even better, some are currently trading below their NAVs.
As the REIT sector crashed by more than 50% recently due to the Covid-19 crisis, there are more than 10 REITs are trading at double-digit yield. However, not all these REITs fulfil our criteria.
We only look for REITs trading at a minimum of 5% dividend yield, consistent dividend payout, discount based on its historical valuation and managed by a team with a clear growth strategy.
We call these dividend growth REITs.
With good fundamentals, we are betting that the price of these REITs will likely to go back to at least the value before the Covid-19 crisis.
Click for more on our Advanced Strategy.
Start putting together your high quality, high dividend yield, high growth potential REIT portfolio today!