There is always an urge to buy companies with great dividend yield. It is as close as one can get to instant gratification (you get dividend income…). One interesting fact about my portfolio is the lack of any REITs – which we all know is high in dividend yield. I read about them everywhere – they are impossible to miss. Looking back, there is always a tinge of regret in not doing sufficient research and grabbing shares of stable companies or REITs stocks with high dividend yield (eg. Starhub, Suntec REIT, etc). I have perhaps missed the boat. It is not uncommon now to see bloggers showing their portfolio with REITs or Telcom shares being the main winners.
However, is picking stock as simple as picking companies with high dividend yield? (read here) There are people whose portfolio consists just purely of REITs, and whose sole purpose is to find companies with high dividend yield. Sure dividend yield is an important factor to consider (it is tempting esp. when we have Lippo Malls Indonesia Retail Trust (SGX: D5IU) with a yield of 7.8% (as shown in Aug 2014))… but so is high ROE and low debt.
I once read that to be a good investor, one needs to have 2nd and even 3rd level of thinking. The question really is: are these companies able to sustain this kind of high dividend yield in the coming years. For instance, let’s take Lippo Mall trust – I read that they pay out almost all their profits in dividend (correct me if I am wrong) – how long can they sustain that without using at least some of the income to do AEI /upgrading or in repaying their debt/interest?
Debt is an almost unavoidable part of REITs’ make up. Hmm…What’s with the hurry with the listing of so many REITs in the recent years. Recently, we hear of many companies jumping into the bang-wagon of REITs (here) eg. SPH…OUE…And now Boustead… as an investor, I question why. Why are so many companies so eager to separate their real estate from their core businesses?
When I read the reasons why SPH wants to create a REIT (here). I see reasons beneficial for SPH: Unlock value in the Properties, Strengthen the Group’s balance sheet, Create an efficient platform for the holding of investment properties,Continued majority ownership of the Properties,Fee income…
How about generate income / profits for the REIT investors?
With the recent higher mortgage payment or SIBOR (here), can all those REITs which are heavily leveraged be able to generate that kind of yield? My information may not be updated – but looking at a table in Sept 2014 (here) , typical gearing is 25 to 40%.
On the other hand with every high dividend stock, there are the high growth stocks (which incidentally have almost zero debt) which have modest dividend yields that give impressive results (eg. Vicom, Raffles Medical & Riverstone).
Growth companies and high Dividend companies have seen their share prices increase over time with the improving economy.
For instance both Vicom stocks and Suntec Reit stocks have been progressively increasing in price. There has gotta to be something good with these companies right?
When you combine the profits you get from increase in stock price plus high dividend income, that is indeed super sweet.
“Buy shares of businesses with durable competitive advantages that generate high returns on equity with little or no debt. “ Charlie Munger
Sure there are REITs which consists of real estates in prime locations generating consistent profits… but it really takes more in-depth study. Inflated prices of assets (here and here), Income Support (guarantees a minimum level of income and yield for the initial few years for IPOs that will satisfy the need of the investor), quality of properties (am not an expert in properties), etc…
In addition, I have my share of buying companies at the tops (of the cycle) only to see the stock prices of these companies drop due to external factors (not within control / fundamentals of these companies).
Being the lazy investor I am (eg. I don’t actively trade, nor actively research), the last thing I want to hear is profits being eroded by rising interest rates on debts. And also I don’t monitor the prices by the seconds, minutes or hours or even days ( I have a full time job), and you can bet I don’t have the time to ‘bail-out’ when prices crash. And really how much news can a company generate within a week or month? On the contrary, I tend to buy more when prices drop if fundamentals remain the same.
So the question is – moving forward what kind of stocks will you purchase? Or should we examine what we have in our portfolio moving forward?
I don’t like to sell my stocks. I like to hold them for years, and given the choice, I would probably buy a high growth company with modest yield and zero debt. Yah, I know maybe interest rates will stay flat for another couple of years and the stocks in my portfolio would again under-perform (and apparently no dividend yield to boast about, worse – stock prices drop). :p