How To Value REITs Using Dividend Yield Comparison

Updated: Nov 27, 2020



Not all REITs have fifty industrial properties or thirty retail malls. But they make money through collecting rental income from managing the assets. As unit holders, we receive the rental income in the form of dividends after taking into account all the fees and expenses. All REITs are required to payout at least 90% of the distributable income based on the regulation. Thus, when it comes to REITs valuation, that's where the dividend yield comes in.


As the name implies, it's based on dividends and share price. As a reminder, that's how much money an investor receives relative to the share price. In general, you would want to receive as much as dividends possible, allowing you to retire and live on the dividends income one day.


How to value REITs using dividend yield


The dividend yield is a very commonly used metric that's worth wrapping your head around. Plus, unlike any other valuation models, it's rather simple to calculate. Simply take the company's dividend per share and divides it by the share price. Or, you can just go to our REITs data page to retrieve the info.

Source: REITs data


As with any other financial ratios, the dividend yield is mostly not as useful by itself. Of course, one can use it as a guide on how much passive income you are looking for. For example, one might prefer a REIT or stock with at least 5% dividend yield, while another is comfortable with a 3% dividend yield.


A better approach is to compare the dividend yield to its peers (for example, we compared Capitaland Mall REIT with other retail REITs like SPH REIT or Stahill Global REIT).

Source: REITs data


Another way is to compare the current yield with its historical trend. This will give us an idea of whether the current pricing is "expensive" or "cheap". In other words, dividend yield can also be used to establish a fair share price. Take Suntec REIT for example, the historical average yield was 5.92%, with the highest and lowest yield of 8.96% and 4.65% respectively. Using the dividend yield formula in reverse, the FY2019 annualised distribution per unit is $0.1, the fair value of Suntec REIT will be $1.69 ($0.1/5.92%), with a volatility range of $1.11 ($0.1/8.96%) to $2.15 ($0.1/4.65%).