If you are an income investor, you’re in luck.
You now have an option to invest in an asset class that churns out a consistent and dependable dividend.
This flow of passive income could even grow over time, allowing you to build up a comfortable nest egg for your retirement.
Yes, I am talking about real estate investment trusts or REITs.
These bundles of real estate have been packaged together and listed on a stock exchange, providing an easy and convenient way for investors to gain access to a portfolio of quality properties.
Unitholders of REITs not only enjoy abundant liquidity but can also gain exposure to different property sub-types to help diversify your investment exposure.
Here are four reasons why we believe REITs qualify as great dividend stocks.
The requirement to pay out the bulk of earnings
REITs are required to pay out at least 90% of their earnings as distributions to enjoy tax benefits.
This requirement means that the REIT does not need to pay corporate taxes as long as it adheres to this 90% or higher payout.
Unitholders will, therefore, enjoy regular distributions as REITs are mandated to pay their distributions either half-yearly or quarterly.
Mapletree Industrial Trust (SGX: ME8U) and Mapletree Logistics Trust (SGX: M44U) both pay quarterly distributions, while REITs such as Frasers Centrepoint Trust (SGX: J69U), or FCT, and CapitaLand Integrated Commercial Trust (SGX: C38U) pay out half-yearly distributions.
Regular companies have the discretion to withhold paying dividends if the business is not performing well, but REITs do not have this option.
Physical real estate
REITs rely heavily on external financing to operate, and their balance sheets are usually loaded with bank loans and other borrowings.
However, note that these borrowings are pegged to the underlying real estate within their portfolios as collateral.
REITs will periodically refinance the debt to take advantage of favourable interest rates.
As long as the REIT owns high-quality, well-located properties, its assets should hold its value.
Another advantage of owning REITs is that they are professionally managed.
An experienced REIT manager is appointed to ensure tenants pay their rent on time and to take care of all building maintenance and upkeep.
Good REIT managers also help to select quality, reputable tenants that help the REIT to stay afloat during tough times.
For retail REITs such as FCT, the REIT manager also helps to curate the mall mix to achieve an optimal selection of vendors that can attract high footfall.
Contrast this to owning a physical property where you, as the landlord, have to manage the tenant yourself and ensure the property is being maintained well.
With a REIT being professionally managed, you save yourself the hassle of chasing tenants for rental payments and enjoy a portfolio of well-maintained properties that churn out a steady stream of cash flow that goes into your bank account.
DPU and asset growth over time
Finally, the most important reason for owning REITs is their ability to increase both their asset base and distribution per unit (DPU) over time.
REITs have the option to acquire to grow their assets under management or undertake asset enhancement initiatives to boost their properties’ attractiveness.
Positive rental reversion is also another option that REITs tap on to grow their DPU organically.
Several REITs have posted impressive growth over the years.
Keppel DC REIT (SGX: AJBU) started with just eight data centres in six countries with assets under management (AUM) of S$1 billion in January 2015.
DPU back then stood at S$0.0651.
More than seven years later, the data centre REIT now owns 21 data centres across nine countries with an AUM of S$3.5 billion as of 31 March 2022.
Its DPU has shot up to S$0.9851 for its fiscal year 2021.
Unsurprisingly, Keppel DC REIT’s unit price has also increased in tandem with its asset base and DPU.
The REIT traded at S$0.95 in December 2014 but has seen its unit price more than double.
By owning REITs that grow their DPU, investors can also enjoy steady capital appreciation.
Get Smart: Include well-managed REITs within your portfolio
Now that we have established why REITs qualify as great income instruments, it’s time you consider including some in your investment portfolio.
The key is to look for well-managed REITs with strong sponsors.
A strong sponsor helps to support the REIT during challenging times and also has a ready pipeline of properties to inject into the REIT to help it grow further.
Not sure which REIT to put your money in? Use our 7-step REIT checklist to find one that fits into your retirement plan. Checklist is inside our latest FREE report “Singapore REITs Retirement Plan”. Click here to download it now.
Disclaimer: Royston Yang owns shares of Mapletree Industrial Trust and Keppel DC REIT.