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Picking High-Yielding REITs is a Loser’s Game – Here’s Why

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Singaporeans as a whole tend to be yield-hungry investors. This is reflected in the number of people who both took on Hyflux’s perpetual bonds (which later on became chains) as well as the enormous draw of REITs as an investment vehicle – this can be seen in the share price of so-called “good sponsor” REITs, which has been on an upward tear this year.

Mapletree Commercial Trust, for example, has gained 50% Year to date.

The big question is this -> is picking a high-yielding REIT really going to help your portfolio performance?

If you have everything (and I do mean everything) inside Mapletree Commercial Trust, good on you. Your portfolio has gained 50% year to date. Being all in on it would have meant that you foresaw Trump’s antics sending investors panicking into yield havens and into premium top class REITs beyond the usual business performance backing the share price.

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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.

If you, like 99.99% of other investors, however, hold a diversified portfolio of REITs, the question becomes, does picking high yield REITs result in better portfolio performance?

We can answer this question by simply looking back in time and drawing a comparison against the baseline, (ie; all stocks).

Comparing the results with the baseline, we will be able to tell ourselves how a dividends strategy will perform moving forward.

Straits Time Index Blue-chips

There are 30 stocks in the STI Index, so investing in an equally-weighted index can form a credible baseline to compare the dividend strategy.

For the dividend strategy, we choose 15 of the STI stocks with the highest dividends and back-test it over a number of years, rebalancing and running the screens again every year.

Back-tested over 5 years, the STI dividends strategy has outperformed slightly, generating 1.17% returns versus the 0% of the baseline strategy.

This, unfortunately, comes with higher downside risk. Outperformance occurred over the 10 year period as well with a higher return of 7.98%, this time at a lower risk.

We can conclude that choosing blue-chips based on dividends yields is not a bad idea.

It may even be better moving forward given that the laggard HPH Trust has been replaced by Mapletree Commercial Trust moving forward.

All SGX Stocks

There are 700+ stocks in traded in SGX and we can’t reasonably trade in all of them. To produce our baseline, we eliminate China-domiciled counters (for fear of fraud), REITs and stocks below $50M in market capitalisation (because liquidity is important).

This creates a more investable portfolio of around 300+ stocks. To create the dividends portfolio, we simply shortlist half the universe of stocks and produce 150 counters that gave higher dividends.

The outcome is as rosy as STI stocks.

The high dividend strategy managed to push overall returns to a positive number from a negative one for the baseline and outperformance was over 6% over 10 years.

Over five years, the downside risks were higher but over a 10-year horizon, a dividends strategy actually came at a lower risk.

This is the strongest vindication of the dividends strategy as we move away from blue chips to mid-cap and small cap stocks and a dividend strategy is a key strategy for most stock investors.

Real Estate Investment Trusts

There are about 40+ REITS in the stock market in Singapore and a baseline consists of an equally-weighted portfolio consisting of them. The High Dividend strategy involves picking 20 REITs that yield the highest dividends.

From the back-test, it is clear that we can have too much of a good thing.

The 5 and 10-year returns of dedicated dividend portfolio consisting of REITs would have underperformed the baseline at a higher downside risk.

This is a clear reflection of the herding instincts of many dividends investors who plough their capital into real estate investment trusts- the dividends strategy is no longer a superior one.

Conclusion

The question of whether a dividends strategy is best for an investor cannot be answered in a straightforward manner.

For this latest round of back-tests, a dividends strategy still performed better than the baseline performance for blue-chips, mid-cap stocks, and small-cap stocks.

When we actually consider an asset class that is favoured by most dividend investors, picking REITs based on dividend yields actually turns out to be a loser’s game.

A savvy investor needs to be nimble and learn how to employ quantitative models to confirm the viability of their investment strategies so as not to be stuck with outdated notions of what works in SGX.

If you are interested in learning how we construct dividend portfolios designed to withstand market swings and deliver consistent passive income, you can book a seat to our introductory session here.

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