,

Can We Have a Dividend Portfolio Without REITs?

Author: | Date:

A common complaint by a retail investor is that REITs are currently over-priced and the challenge would be to find an investment strategy beyond that of simply buying and holding onto a portfolio of REITs

Making matters worse, with the introduction of Mapletree Commercial Trust into the Straits Times Index, this would mean that 4/30 stocks in the index are now Real Estate Investment Trusts.

*REITs are a favourite among Singaporean retail investors due to the relatively high dividend payouts and the simple idea of collecting dividends from rent, often secured with contracts and longer cashflow predictability.

This presents a problem for those who are trying to retire early on the back of dividends from their portfolio – a drop in value means a drop in cashflow which significantly affects retirement livelihood.

Get a sneak peer at my Early Retirement Masterclass

  • Qualifications include a Juris Doctor(Cum Laude)
  • Bachelor in Engineering from NUS (1st Class Honours)
  • Masters in Applied Finance also from NUS.
  • CAIA, FRM qualifications and passed all three CFA examinations.

My dividends surpassed my living expenses when I was 32. I retired when I was 39 on an average of $9-$11,000 worth of dividends each month.

That is why it is important to have counterbalances – when something drops, something else rises so that our portfolio’s value remains stable and allows us to sleep at night lest Trump is found doing unspeakably Twitter things.

This can present a headache for REITs investors who are trying to diversify into blue-chip equity counters.

Most of the better screens conducted over the STI components will result in a list containing REITs anyway which would not be helpful for the purposes of diversification.

To resolve this issue, some investors would screen the STI based only on 26 non-REIT counters, but this results in portfolios that are too small once the screening criteria are tightened.

A better possible solution would be to simply choose the 40 stocks in SGX sans REITs that has the largest market capitalisation and work to see whether a better strategy can arise out of this subset of stocks.

This provides a solid base of 40 of the largest stocks in the Singapore Stock market and facilitates the lowest margin financing fees from local brokerage companies.

In practice you will end up working with stocks such as those found below:

Back-testing the performance of these 40 stocks results in dismal performance over the past 10 years, signifying the importance of REITs in every investor’s arsenal.

This is not a good start to our exercise, as our task is to now find a way to filter the largest stocks to complement an existing REIT portfolio.

We start with the hypothesis is that value factors will result in superior performance. Our next step would be to further short-list 20 stocks based on superior value factors like low PE ratio, low PB ratio and high dividend yields.

Observing the results above, we can easily conclude that value investing factors work quite well with Singapore blue-chips although back-tested performance continues to be dismal.

Unperturbed, we perform some work to pare down the stocks to ten counters – this means employing value two factors instead of one.

Choosing 10 stocks with the lowest PE ratio out of 20 stocks with the highest dividends improves performance further, but even after employing two factors to distil our blue-chips into a stock list containing only ten stocks, we are still struggling to reach a back-tested 1% return for the past 5 years.

In comparison, a naïve strategy that buys all REITS without any attempt at filtering will earn 6.53% over the past 5 years.

From this point on, a lot more work needs to be done to find a combination of factors that leads to a strategy that can complement a REIT portfolio. Perhaps a different pair of factors need to be tested. Alternatively, looking for stocks that have sustainable dividends always results in a slight boost to performance.

This sad exercise, conducted over a Bloomberg terminal within 15 minutes, demonstrates how difficult it is to wean off REITs in a portfolio and this can be largely explained by government policy – unlike other forms of equity on SGX, REITs are highly tax-advantaged instruments that do not incur taxes at the corporate entity and personal level. This is possibly the best explanation as to why returns for REITs have been superior even at a much lower risk.

Moving forward, we can expect more retail investors to cycle their monies into this asset class.

Arguments that REITS are overpriced may sound intelligent, but finding alternatives to REITs in this market is a difficult challenge that will vex the best retail investors at the moment.

If you’re interested in learning how we use a combination of REITs and stocks to safely engineer a sturdy, market resilient passive income machine, you can register for a seat here.

Leave a Comment