For dividend investors, the dividend yield is the very first and sometimes the only reason why you're attracted to REITs. Typically, REITs will payout 90% of its taxable income to the unitholders to enjoy tax benefits. Thus, this enables REITs to offer stable yet relatively high dividend yields as compared to other financial instruments like bonds or fixed deposits.
With little or no retained earnings, the dividend yield is probably the most critical financial ratio to evaluate REITs.
Dividend Yield = Distribution Per Unit ÷ Stock Price
For example, if a REIT's share price is $1 and its distributions per unit are 10 cents, then the dividend yield is 10%.
So how do investor use distribution yield to evaluate REITs?
The answer depends on each investor's risk appetite and the REITs' fundamentals. For example, if you need a 5% dividend yield, you may prefer to own a more stable REIT like Capitaland Mall Trust or Ascendas REIT. If you need a higher yield (e.g. 7 or 8%), you may prefer a REIT with oversea properties like Sasseur or EC World REIT. Even though you will enjoy a higher yield, you are also exposed to currency and geopolitical risks.
If the REIT is still fundamentally strong and stable, you should continue to receive consistent or even growing dividends regardless of the short term volatility of stock prices. For example, Mapletree Commercial Trust has been increasing its DPU by almost 4% per annum for the past five years. While the dividend yield is critical, the REITs' ability in paying stale and growing DPU is also essential.
In Singapore, industrial REITs offer higher dividend yields as compared to office or retail REITs. The higher yield reflects that the market demands a higher yield to compensate for the higher volatility in industrial rental rates and the lower grade of the assets as compared to the other REITs.
REITs' Dividend Yield vs Government Bond Yield
If a REIT and a government bond are paying the same yield, you might as well invest in the bond as it is much less risky. In the year 2006 and 2007 during the bullish market, REITs' yield has fallen to less than 4% on average, while the 10-year government bond yield was trading at around 3.2 - 3.5%. The yield spread of REITs was compressed, which was also a sign that the REITs' prices were overvalued. You can refer to the yield spread chart here for more details.
While the dividend yield is a critical financial ratio to evaluate REITs, one should not blindly invest in a REIT only because it has a high dividend yield. Investors must always consider the REIT's fundamentals, different sectors of the REITs, yield spread etc. before investing in any REITs.