Are Investors Becoming Unrealistic?

UnrealisticJP Morgan Asset Management has just released its latest confidence index. The index was compiled after surveying 500 investors online.

The index hit a two-year high last month – hitting 122 points in June – the highest since June 2011. In December 2012, the index was at 106 points. The full survey findings can be found here.

Today, I would like to discuss two salient points. One was revealed in the survey while the other was reported in an accompanying newspaper report.

High expectations?

In the survey, under the heading of “Main investment objectives and products for stable income streams”, it was highlighted that almost half (46%) of the respondents expect a yield of between 4% and 6% on their investments. Meanwhile, nearly a quarter (26%) expects a higher yield of between 6% and 8%. This group formed the bulk of the percentage.

Under the same heading, almost half (49%) of those surveyed invest in high-dividend stocks while two-fifths (44%) invest in real estate investment trusts (REITs). This made up 93% of the respondents.

This begs a question: Are investors expecting too much from their investments?

To answer that, I did a screen on the yields of the high-dividend stocks and REITs listed on the Singapore Exchange.

The top 30 highest yielding stocks in SGX had an average dividend yield of 10.7%. It beats the yield expected by most investors in the survey. However, do you have the stomach to invest in such stocks?

Taking the top spot was Gems TV Holdings Limited (SGX: AM3). It yields a salivating 36.5%. However, the dividend payments were spotty.

It didn’t pay dividends between 2008 and 2011 as it was loss-making but it did so last year, paying 0.95 cents per share. With the price at $0.026 at the time of writing, the yield translates to the above-mentioned figure.

It is also interesting to note that Gems TV is part of the SGX Watch-list. Stocks become part of the watch-list if the company has (1) pre-tax losses for the three most recently completed consecutive financial years and (2) an average daily market capitalisation of less than $40 million over the last 120 market days on which trading was not suspended or halted.

The lesson here is that we have to be wary of high-yielding stocks during normal market conditions. Most of the high-yielding stocks are not fundamentally strong to begin with. This is hardly surprising. When the stock price gets depressed due to the underlying business making losses, the dividend yield shoots up. Investing in such companies would prove to be futile.

The average yield of the Straits Times Index (SGX: ^STI) currently stands at 2.8% while the FTSE ST All-Share Index (SGX: ^FSTAS) yields 3%. This is much lower than the expectations of most of the investors surveyed.

Let’s look at the REITs now. The dividend yield of the 26-listed REITs stands at 5.5%, as measured by the FTSE Straits Times REIT Index (SGX: FSTAS8670).

The highest yielding REIT is Sabana REIT (SGX: M1GU) at 7.5%. Sabana is an industrial REIT with a gearing of 37.7%, which might explain the high yield.

Industrial REITs are cyclical in nature as they are closely correlated to the economy. Occupancy rates can also be volatile as it could depend on the vagaries of the economy. Also, the REIT may be hit hard when interest rates rise in the future. As such, a higher yield is demanded to compensate for the higher risk investors take on.

Even Higher Expectations?

In a Straits Times report on 18 July 2013, Mr Geoff Lewis, JP Morgan Asset Management’s market strategist, was interviewed. He said that many investors seemed to be obsessed with the idea of investing in companies where they could get returns of 1,000% in half a year.

To that, he simply said, “Instead of chasing fool’s gold, they would do better by looking at steady sound companies with a strong track record.

I cannot agree more with him. A thousand per cent return in six months will equate to a 3,500% return on an annualized basis. Such investments sound too good to be true. Even Warren Buffett only amassed 19.7% per annum for the past 47 years.

Steady sound companies with a strong track record have given decent returns as seen from here. It’s certainly not the 1,000% in half a year. 1,000% in ten years is satiating enough. Slow and steady does it.

Foolish Bottom Line  

When investing, we should always have realistic expectations. Expecting to invest in high-yielding stocks with strong business fundamentals, in a normal market condition, such as now, sounds far-fetched. Expecting a thousand per cent returns within half a year is even far off. But by curbing our expectations, we might actually do better.

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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 Sudhan P doesn’t own shares in any companies mentioned.