7 high quality REITs with rising dividends
The rate hikes have a negative impact on REITs.
The iEdge S-REIT Index was down 16% year-to-date.
Although it seems like REITs have fallen less than the other stocks, it is considerable to REIT investors who often go for yields - a 5% dividend yield would not be able to cover the 16% capital loss.
And rising bond yields could have prompted some investors to dump REITs and buy bonds instead, causing REIT prices to fall.
But it pays to be a contrarian in the markets at times - the general thinking is that there will be more rate hikes and a recession is looming - while investors are pessimistic about REITs, there might be opportunities to buy.
We want to focus on the high quality REITs as they are more suitable for long-term investments. Lower quality REITs tend to entice investors with higher dividend yields but issues often arise when given enough time.
Hence, high quality REITs would allow an investor to have less headaches and heartaches while holding them long-term.
We define high quality REITs as those that were able to consistently raise their distribution per unit (DPU) over a long period of time.
The premise is that it isn't easy to raise rent each year so as to pay out higher dividends to unit holders.
It usually means that they have great properties that could command higher rents and that the management is doing a good job in extracting value from these properties.
Here are seven of them which pass the test, with their DPU's 10 year compounded annual growth rate
- Mapletree Pan Asia Comm +6%
- Mapletree Industrial +5%
- ParkwayLife REIT +4%
- Frasers Centrepoint +4%
- Mapletree Log +3%
- CapitaLand Ascendas +1%
- CapitaLand Integrated Comm +1%
The next question is - are they worth buying?
To answer this we look at the yield spread between the Singapore Government 10-year bond yield and the REIT Index's forward dividend yield.
According to SGX, the 10-year average spread is at 3.83%.
REITs are worth buying if their yields are above the sum of SG 10y bond yield and yield spread.
Current 10y bond yield is at 2.87%. And that means REITs should yield at least 6.7% to be worthwhile.
But we should note that the yield spread of 3.83% consists of all the REITs, including the high yield REITs which have widened the spread. High quality REITs usually offer lower yields.
Hence, if we take a 30% discount to the spread, we will get a minimum yield requirement of 5.6%.
Here are the high quality REITs that have forward yields above 5.6%
- Mapletree Industrial 6.2%
- Frasers Centrepoint 5.9%
- Mapletree Pan Asia Comm 5.8%
- CapitaLand Ascendas 5.8%
You can change the discount to the spread according to your preference - lower it if you are conservative but we wouldn't suggest to increase the discount.
You can download the full report on these high quality REITs that contain information about their DPU history, property portfolios, debt profile, forward yields and 10y total returns: 7 high quality REITs with rising dividends
The iEdge S-REIT Index was down 16% year-to-date.
Although it seems like REITs have fallen less than the other stocks, it is considerable to REIT investors who often go for yields - a 5% dividend yield would not be able to cover the 16% capital loss.
And rising bond yields could have prompted some investors to dump REITs and buy bonds instead, causing REIT prices to fall.
But it pays to be a contrarian in the markets at times - the general thinking is that there will be more rate hikes and a recession is looming - while investors are pessimistic about REITs, there might be opportunities to buy.
We want to focus on the high quality REITs as they are more suitable for long-term investments. Lower quality REITs tend to entice investors with higher dividend yields but issues often arise when given enough time.
Hence, high quality REITs would allow an investor to have less headaches and heartaches while holding them long-term.
We define high quality REITs as those that were able to consistently raise their distribution per unit (DPU) over a long period of time.
The premise is that it isn't easy to raise rent each year so as to pay out higher dividends to unit holders.
It usually means that they have great properties that could command higher rents and that the management is doing a good job in extracting value from these properties.
Here are seven of them which pass the test, with their DPU's 10 year compounded annual growth rate
- Mapletree Pan Asia Comm +6%
- Mapletree Industrial +5%
- ParkwayLife REIT +4%
- Frasers Centrepoint +4%
- Mapletree Log +3%
- CapitaLand Ascendas +1%
- CapitaLand Integrated Comm +1%
The next question is - are they worth buying?
To answer this we look at the yield spread between the Singapore Government 10-year bond yield and the REIT Index's forward dividend yield.
According to SGX, the 10-year average spread is at 3.83%.
REITs are worth buying if their yields are above the sum of SG 10y bond yield and yield spread.
Current 10y bond yield is at 2.87%. And that means REITs should yield at least 6.7% to be worthwhile.
But we should note that the yield spread of 3.83% consists of all the REITs, including the high yield REITs which have widened the spread. High quality REITs usually offer lower yields.
Hence, if we take a 30% discount to the spread, we will get a minimum yield requirement of 5.6%.
Here are the high quality REITs that have forward yields above 5.6%
- Mapletree Industrial 6.2%
- Frasers Centrepoint 5.9%
- Mapletree Pan Asia Comm 5.8%
- CapitaLand Ascendas 5.8%
You can change the discount to the spread according to your preference - lower it if you are conservative but we wouldn't suggest to increase the discount.
You can download the full report on these high quality REITs that contain information about their DPU history, property portfolios, debt profile, forward yields and 10y total returns: 7 high quality REITs with rising dividends
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