Don’t Chase Yields Blindly

Ser Jing - Don't Chase Yields Blindly (pic)

In this low interest-rate environment, dividend yields from shares (or distribution yields from trusts) seem to gain prominence – we just have to take a look at the real estate investment trusts (REITs). As a group, they can be represented by the FTSE Straits Times Real Estate Investment Trusts Index (SGX: FSTAS8670), which sports a dividend yield of 4.8% as of 30 April 2013. That’s much higher than the typical yield in the market, represented by the Straits Times Index’s (SGX: ^STI) 2.9% yield.

The high yield of the FTSE ST REIT Index alone doesn’t say much. But, when you consider how it has gained 12.6% in the first four months of 2013 – compared to the STI”s 6.4% return – it shows how much investors value a high dividend or distribution yield.

High yields might be the in thing now, but it might be a mistake to hop on board a share or trust merely for its yield. Why? Let’s take a look at Ascendas India Trust (SGX: CY6U) and CitySpring Infrastructure Trust (SGX: A7RU) to find out.

Trust Current Price Distribution Per Unit (DPU)** Distribution Yield**
Ascendas India Trust $0.82 4.65 cents 6.30%
CitySpring Infrastructure Trust $0.50 3.51 cents 7%
**Note: DPU figures are for the trusts’ most recently completed financial year. Distribution Yields are calculated using the DPU and Current Price.

The two trusts have distribution yields more than twice the market’s and at first glance, might seem like income investors have hit pay dirt. But, if we take a look at the pay-out histories for them, a bleaker picture emerges.

Ascendas, which owns business parks and buildings specifically in India, has seen its annual distribution per unit (DPU) fall in consecutive years from March 2010’s 7.55 cents to March 2013’s 4.65 cents. Indeed, investors who bought units in the trust at the start of 2011 for $0.93 with a distribution yield of 8% (based on March 2010’s full-year pay-out) would have seen the yield shrink to 5% based on a DPU of 4.65 cents.

CitySpring invests in other trusts that are involved with infrastructure assets that provides gas and electricity among others. While it is busy supplying cities with gas, its distributions to investors have been running out of gas – CitySpring’s annual pay-outs have been declining every year since March 2008. The trust’s DPU has fallen from 7.08 cents to 3.51 cents for March 2012.

Granted, there was a series of rights-issues for CitySpring which would have resulted in existing unit holders been given more units if they had subscribed for the rights. That might have increased the pay-outs investors would have received as the increase in units compensates for the decrease in DPU.  But, rights-issues would mean that investors have to fork out additional capital, which is not ideal. Those who are unable to do so will see their stake in the trust get diluted and have to deal with much smaller incomes.

Actually, the message here is simple: it can be a big mistake to focus solely on a share’s current yield as a thesis for investment. A high-yield can sometimes mask an ongoing deterioration in a business or trust’s operations. For example, Ascendas’s shrinking distributions was the result of falling income from its properties.

As long-term investors, it pays to dig in a little more to find out about a company or trust’s pay-out history and possible ability to maintain or increase pay-outs in the future.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.