High Dividend Yields May End Up Wrecking Your Income

All things being equal, for investors looking for income, a share with a high dividend yield would trump one with a lower yield. But in reality, all things are not equal. In fact, high dividend yields may even end up lowering your income stream in the future if you’re not careful.

Ascendas India Trust (SGX: CY6U) is a business trust that owns business parks in India. At its current unit price of S$0.825, prospective investors are getting a trailing distribution yield of 5.5% based on its distribution of 4.56 Singapore cents for the financial year ended 31 March 2014 (FY2014).

That’s a yield more than twice what investors can get from the ‘market’ in the form of a plain-vanilla index tracker like the SDPR Straits Times Index ETF (SGX: ES3). The ETF, which aims to mimic the movement and composition of the Straits Times Index (SGX: ^STI), has a yield of only 2.7% as of 26 June 2014.

On the superficial basis of having a higher yield, Ascendas India Trust would then be an attractive investment target. But, a closer look beneath the surface at just its dividend history would paint a different picture.

Financial year ended 31 March Distribution per unit (Singapore cents)
2009 7.54
2010 7.55
2011 6.58
2012 6.00
2013 4.65
2014 4.56

Source: S&P Capital IQ

From the table above, it’s easy to see how the share’s distributions have shrunk rapidly over the past five years. At the start of June 2012, Ascendas India Trust was selling for S$0.755 per unit and so an investor could easily have gotten a really high trailing distribution yield of 7.9% (based on the distribution of 6.00 cents for FY2012).

Today however, that investor’s investment would only be yielding him 6% on his cost basis; his yield has shrunk. Back then, the Indian rupee had already started falling significantly against the Singapore dollar as seen below.

Year Approximate Indian rupee / Singapore dollar exchange rate
First quarter 2008 94
First quarter 2012 72

Source: Ascendas India Trust’s January 2014 earnings presentation

With Ascendas India Trust’s assets and operations being based in India, it would have meant a shrinking of the trust’s future rental income after conversion into Singapore dollars if the rupee had continued falling. That might be a factor explaining why investors could have gotten a high yield on the trust’s units back in mid-2012 as the market feared such a situation developing. As it turns out, the rupee did continue declining, and the trust’s distributions tagged along for the fall.

All told, the message here is simple: Don’t chase high yields blindly. There are reasons as to why a share is giving out such high yields. Sometimes, these are legitimate reasons that are related to a future deterioration in the share’s underlying business fundamentals. Of course, there are times when the market’s just being irrational, but that’s a judgement we can only make after a deeper look into the share’s businesses.

Keep that in mind the next time you’re out hunting for an income share. It pays to dig deeper into a share’s dividend history and possible ability to maintain or grow its pay-out in the future.

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool’s purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

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