The Motley Fool

Which Asset Class Provides the Best Yield?

Passive income is perhaps the ultimate goal of most investors in Singapore. The thought of growing your wealth without lifting a finger is extremely appealing to retirees who are looking to maintain their lifestyles after exiting the workforce.

With that said, I decided to do a quick review of which investment can provide the biggest passive income cash flows.

Property

It is no secret that Singaporeans love investing in property — and perhaps for good reason, too. Property in Singapore has appreciated at an unprecedented rate due to the limited land supply and population growth. The strong economy and low interest rates have also enabled more people in Singapore to afford their own homes, driving home prices up in the process.

To calculate the rental yield of a property, I will use a typical S$1 million property as a gauge and take into account the loan-to-value ratios.

An investor who can take on the maximum loan will have a loan-to-value ratio of 75%. This means for a $1 million investment property, the investor will have to fork out $250,000 and take out a $750,000 loan.

A $1 million property in Singapore can typically command a rent of around $2,500 per month. Based on this example, the annual rental income for the property is $30,000. Given that the investor forked out $250,000 in cash, the equity yield, or cash-on-cash yield, comes to around 12%.

Real estate investment trusts

Another option for cash flow from your investments is real estate investment trusts, or REITs. REITs are investment vehicles that invest in property and distribute the rental income earned to shareholders (unitholders) of the trust.

There are more than 40 REITs and stapled trusts listed in Singapore, ranging from industrial REITs to retail REITs. REITs can specialise in investing in a certain category of properties, or they may have a range of different property types in their portfolios.

As of the time of writing, REIT yields can range from 4% to 10%.

Stocks

Owning shares of a stock means you are essentially a part-owner of a company. By buying shares of a company, investors become shareholders who are entitled to dividends the company pays out.

However, unlike REITs, which are obligated to pay out at least 90% of the rental income to shareholders, companies have discretion over how much of their earnings they wish to pay out to shareholders each year.

A low payout ratio may be because the company is reinvesting its earnings to expand or diversify its business.

In Singapore, the Straits Times Index, a commonly used barometer of Singapore’s largest listed companies, has a dividend yield of around 3%.

The Foolish bottom line

There are pros and cons to each investment listed above.

While property provides the highest yield based on the paid-in equity of the investor, the high leverage means investor returns are highly susceptible to interest-rate fluctuations. In addition, there are added costs not included in the above calculation, such as property maintenance, agent fees, and buyer stamp duties. Also, the risk of empty rent can materially affect your yield and returns.

On the other hand, REITs have lower yields than buying an actual property, but the properties are managed by professionals, and the investor is not personally leveraged. This means the yields are usually more reliable, and you don’t have to worry about managing or maintaining your property.

Lastly, stocks may have lower yields, but some have a higher propensity for appreciation than both REITs and properties. Investors should consider the pros and cons of each investment before making a decision on which asset class in which to invest.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.