REITs Investing Strategy: Slow And Steady Win The Race



With the extended low yield environment and the recent rally of the Singapore REITs, we are seeing some of the REITs are trading at their historically low yields. Traditionally, many investors will chase for high yields. Is high-yielding REITs always outperform the low-yielding REIT? In this post, we will discuss one of the critical consideration for REITs investors:


Low yield vs high yield, which is a better REITs investing strategy?


Is slow and steady-going to win the race?


When it comes to dividend investing, a higher yield stock is always preferred as compared to a lower yield stock. Many dividend investors will chase for high yields to boost their passive income in the short term. The same principle applies to REITs investing as well. While the high-yielding REITs might be an acceptable choice for some higher-risk investors, it isn't necessarily the right choice for conservative dividend investors who seek stable and predictable dividends. Also, a high-yielding REIT may not necessarily outperform a low-yielding REIT.


Let's start with a hypothetical example.


Investor A invests in a high-yielding REIT which pays a 10% dividend yield every year while investor B invests in a low yielding REIT which pays 4% yield. The low-yielding REIT offers a much lower return, but the REIT manager manages to grow its portfolio dividend payout by 8% every year.


High yielding REIT – 10% yield every year (10% Yield)

Low yielding REIT – 4% yield and 8% distribution per unit growth every year (Dividend Growth)


Assumptions:

  • The share prices for both of the REITs remain unchanged for 25 years

  • All dividends are reinvested every year.

Below are their portfolio performance over the years.


Investor A, the high yield investor (Blue line int he graph), beats Investor B (Orange line in the graph) during the beginning years. But Investor B caught up in year 23. The total dividends received by Investor B are 50% higher than that of Investor A. Investor B received lower dividends initially but was rewarded with future growth.