How to make a high-dividend REIT strategy work

The Singapore S-REITs markets have been recently gripped by growth fever which saw REITs with a high price to book value attaining higher valuations over the past two years. This phenomenon mirrors the period where growth stocks outperformed value stocks in the US stock markets. Seasoned REIT investors may want to know whether dividends will make a return to the Singapore stock market.

‘Disadvantage’ of investing for dividends?

If you had invested in the upper half of the high-yielding segment of the SREITs universe for the past ten years, your returns would have been 5.1%. Buying high-yielding REITs would earn one per cent lower than buying all available REITs in equal weights. For this reason, a lot of articles on the web talk about the folly of investing solely for dividends in the Singapore REITs market.

5 reasons why investors should pick high dividend stocks

Despite this fact, there is still a strong rationale for investors to pick high dividend stocks:

  1. You don’t think it’s rational to keep picking on high Price to Book value S-REITS for outperformance. Eventually, higher quality will come at a higher price tag.
  2. You want to be able to extract part of your investments without actively selling your REIT securities.
  3. You are older and wish to spend a more significant proportion of your portfolio.
  4. You are part of the FIRE movement and want to experience living on investment income earlier in life.
  5. Dividends have been dominant in the REITs market before, and they can make a comeback once growth investing loses its lustre.

A high-dividend REIT strategy

The solution for successful high-dividend stock investing would be to constrain your universe and work within the top 18 yielding REITs in Singapore. I would use’s new screening features to display the dividends in REITs universe and then manually pick eighteen counters with the highest yields.

The list of 18 counters ( that also includes property-related business trusts ) will look like the following diagram:

  • Facebook
  • Twitter
  • Pinterest
  • reddit

In essence, we are constraining our picks to the REITs that produce the highest dividends. The reward for doing this is that the lowest yield is Starhill REIT at 4.6% yields. So the portfolio will have more payouts than the CPF-SA account.

So we can’t just buy this new universe of 18 high-yielding REITs without experiencing suboptimal returns. Somehow, we will need to figure out which counters will outperform. So we will backtest a subset of 10 counters using with different characteristics to see how we can cherry-pick high-yielding REITs.

We will note down the following during the backtest:

  • Return – Measures the profits if you follow the strategy for the past ten years. The higher, the better
  • Semi-Deviation – Measures the downside risk you will be taking on. The lower, the better.
  • Sortino Ratio – Return minus 3% divided by Semi-Deviation. We use this single number to rank strategies against each other.
  • Maximum Drawdown – Measures the most extensive loss from peak to the trough when executing this strategy for the past ten years. Any system with a drawdown below -50% is not safe for x1.5 leverage.

By testing different factors we will get the following table:

High Dividend REITs Return Semi-Deviation Sortino Ratio Max Drawdown
Baseline 5.10% 10% 0.22 -36.70%
High Momentum ( 180-day RSI ) 8.40% 11.90% 0.45 -41.60%
Low PE 8.60% 12.50% 0.49 -40.20%
Low PB 7.80% 13.10% 0.39 -43.30%
Low Gearing 6.50% 12.40% 0.28 -41.40%
Low Volatility 6.60% 11.20% 0.32 -38.50%
High Revenue Growth 7.90% 11.80% 0.42 -42.10%

We note that when cherry-picking dividends REITs, zeroing in on counters with the highest momentum and lowest PE gives us the best Sortino ratios. So we use to create a score composite that shortlists five counters with the lowest PE ratios and the highest momentum.

High Dividend REITs Return Semi-Deviation Sortino Ratio Max Drawdown
Baseline 5.10% 10% 0.22 -36.70%
High Momentum / Low PE 9.80% 12.90% 0.53 -44.50%

This combined strategy seems to have a decent return and the highest Sortino ratio. Removing counters with negative PE ratios, we shortlist slightly more counters for further qualitative investigation ( such as reading research articles and blogs ) :

  • Sasseur REIT
  • Sabana REIT
  • Suntec REIT
  • Ascendas India Trust
  • ARA Hospitality Trust
  • Keppel Pacific Oak US REIT

At the time of writing, the resulting set of six counters can be a great addition to any dividend investor’s portfolio and can even be safe for leverage up to x1.5. I may be adding Ascendas India to my portfolio to my collection after this exercise for myself, who already have a reasonably substantial REIT portfolio.

Potential Performance of a high-dividend REIT strategy

In conclusion, even if buying high-yielding REITs strategies underperform, there are ways to cherry-pick high yielding counters for outperformance. In this exercise, we use to test a sub-set of high dividend REITs and find that those with the lowest PE ratios and highest momentum tend to outperform compared to the rest.

Building such a portfolio will yield at least 4.6% and can even be leveraged at x1.5 to produce significantly above 6% in dividend payouts.

Source link