REIT investors are probably aware that most REITs pay out a dividend yield of anything between 4% and 8%. This is the average dividend yield range for REITs listed on the local stock exchange, and it is seldom that investors can find a REIT yielding double-digit dividend yields. The reason for this is simple: If distribution per unit (DPU) goes up steadily, other investors will bid up the share price as the REIT becomes more valuable, and this brings the dividend yield back down again.
It is also widely recognised that REITs with double-digit dividend yields may be facing pressure or problems, and their DPUs may not be sustainable. Investors normally punish the share price by selling down the shares if there are negative developments surrounding the REIT, and the historical dividend yield then balloons to double-digit levels due to the depressed share price. This can be misleading for investors who simply glance at the headline yield without bothering to find out more about the REIT’s current situation.
I have discovered two effective ways of capturing double-digit dividend yields from REITs.
1. Buy strong REITs during a financial crisis
The first method requires a strong stomach, and that is to purchase shares of strong and stable REITs during a financial crisis or recession. Recessions tend to dampen consumer and corporate demand for goods and services, which means lower rental and occupancy rates for properties. DPU then declines, and the share price of the REIT will follow as well.
However, if the REIT has quality assets that attract strong tenants, investors should make use of the opportunity to purchase shares at depressed valuations. When the economy recovers and DPU rises again, there is a good chance investors will enjoy a double-digit dividend yield on their capital deployed.
One example of such a REIT would be Suntec REIT (SGX: T82U), which traded at around S$0.60 during the financial crisis in 2008-2009. Suntec owns commercial and retail properties in Singapore and Australia and was listed in late 2004. The REIT has paid out around S$0.10 worth of dividends for FY 2018, so if an investor had purchased the REIT during that period, he would be looking at a 16% dividend yield right now.
2. Buy and hold REITs with growing DPUs
Frasers Centrepoint Trust (SGX: J69U) has managed to grow its DPU every single year for the last 10 years, which is an impressive feat. Investors who buy and hold such REITs will eventually receive a dividend yield exceeding 10%.
FCT was listed in 2006 with just three properties: Causeway Point, Northpoint, and Anchorpoint. If an investor had purchased shares in the REIT in November 2007, when the share price hovered at around S$1.30, that investor would be enjoying a dividend yield of around 9.5% based on the annualised DPU of 12.3 Singapore cents for FY 2019. FCT recently announced the planned acquisition of a 33.3% interest in Waterway Point, and based on that as well as a few other reasons I believe FCT could further increase its DPU, it should only be a matter of time before the prospective dividend yield for FCT exceeds 10%.
The Foolish bottom line
These two methods do require certain psychological traits: a strong stomach for the former, and patience for the latter. If investors can manage their emotions well, deploy their capital at the right moment, and simply sit on their investments for years, they can certainly achieve double-digit dividend yields.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. The Motley Fool Singapore has recommended shares of Frasers Centrepoint Trust. Motley Fool Singapore contributor Royston Yang owns shares in Suntec REIT.