When I mentioned that Capitaland Retail China’s 7.7% yield was attractive in my previous post, one reader rightly pointed out that it is “dangerous to buy based on yield”.
I cannot agree more.
I hope NONE of you will go away with this idea after reading my blog that we should only look at dividend yield to invest and nothing else. There are many great companies out there like Apple, Microsoft who are not having high dividend yield, YET if you have invested in them at a right price, you would have been rewarded very handsomely.
Dividend is Cash, Real & Concrete 😊
However, I feel we cannot deny that dividend is one concrete way of getting the return from your investments.
It is unlike share price that can simply go up and down based on investors’ sentiment, changing risk appetite, pure herd mentality and sometimes just from a few simple words by influential political and economic people. We have seen countless of such instances, especially so in USA lately.
On the other hand, I feel dividend can be relied steadily upon by investors as long as the business we bought into is strong, growing and profitable.
The only reason that a profitable company will choose not to declare dividend is because it has other avenues (like capital investment or repayment of high interest loan) to become even more profitable and cash rich in the future. So that … they can distribute more dividends in future. 😆
Dividends has to be paid from the earnings accumulated by the company over the years. Hence, even when a company is having a bad patch, it can still pay dividends to shareholders from its previous years earnings while it tries to overcome the current challenges.
Therefore, I feel dividend is more concrete and real than relying just on pure share price appreciation to obtain the returns from your investment. The latter leaves a lot exposed and too speculative for my liking.
Revision to Mean
As many of my regular readers will know, Reits made up a significant portion of my portfolio. When evaluating which Reits to invest, I place a lot of emphasis on the current yield.
One reason is because in the case of Reits, I believe in the reversion to mean theory for their yield.
I see it working over an extended period of time. Over the years, I have seen and trend dividend yields of Reits swinging from one end to another and then back again. If we have bought Reits at the higher end of the yield spectrum (i.e. low price), we will have a higher chance of reaping both high dividend yield and possibly appreciating share price when the market is on a bull run.
It is probably due to the fact that Reits is no more than a company that owns property and collects rents – it will go through the up and down of the property cycle which it will eventually return when demand increases or supply reduces when market equilibrates.
We just need to make sure that the Reits that we buy into (when dividend is high or share price is low) are well-managed, strong and have a defensible market share or competitive edge.
However, I can’t say this for other industries and companies. They earn their money differently. So my above belief is confined to Reits only.
Net Asset Value
I know of some friends who buy Reits that are at a huge discount to the Net Asset Value, hoping that one day the gap in the valuation will close either by the market or when a buyer acquired the company.
However, I am not a believer of this.
The reason being that the Net Asset Value of a property in a Reit depends on the earning potential of the property and not just on the value of the property itself.
A prime example is the recent disclosure by Sabana during its proposed divestment of its 1 Tuas Avenue 4 property for a sum of S$11 million, which is 52% below its book value of $23 million.
Interestingly, both valuation was done by the same company. Ahhh !!!!
It was quoted from Sabana’s press release that the earlier $23 million valuation was based on “capitalisation approach and discounted cash flow analysis method” (on 30 June 2018) while the latest valuation (done by the same company on 5 September 2018) of S$11 million was “using the comparison sales method”.
OMG – it’s just 3 months and valuation is now halved
What a big difference the adoption of different valuation methods make … it just reaffirms my belief that net value asset declared by the company cannot be fully trusted and solely used for my investment decision.
A long post I know but bottomline – I still think dividend yield is important and especially in the case of Reits.
Happy to receive your feedback and comment on this.
Thanks and have a great week.