Many Singaporeans are feeling the strain of higher prices as inflation bites.
Even with the recent SG60 Budget, more than half the people surveyed still feel that the goodies dished out were insufficient to help them cope with the increase in the cost of living.
The best method to mitigate this rising cost of living is to invest your money in well-run, quality businesses that pay dividends.
The REIT sector is the perfect asset class for investors who are looking to build a portfolio of dividend-paying stocks.
Read on to find out how REITs can help you to compound your money and achieve a comfortable retirement.
REITs are built for income
REITs consist of a bundle of real estate assets that are packaged together in a portfolio.
These properties generate steady, recurring rental income for the portfolio, which is professionally managed by the REIT manager.
REITs are mandated to pay out at least 90% of their net profit as distributions to enjoy tax incentives.
Because of this requirement, REITs have to pay out regular distributions that can be either half-yearly, or quarterly.
In doing so, this asset class becomes perfect for income-seeking investors due to the reliability of its distribution.
If you own a portfolio of REITs, you can be certain that you will enjoy a stream of passive income flowing straight into your bank account.
Accumulating blue-chip REITs
But which REITs should you buy?
With a plethora of choices out in the Singapore stock market, this is the next natural question that income investors will ask.
A simple rule of thumb is to go for blue-chip REITs which are part of the Straits Times Index (SGX: ^STI).
These REITs have a large market capitalisation, and a long track record, and are backed by reputable sponsors that act as a lifeline for the REIT during tough times.
One good example is CapitaLand Integrated Commercial Trust (SGX: C38U), or CICT.
The retail and commercial REIT recently declared a distribution per unit of S$0.1088 for 2024, up 1.2% year on year.
CICT is also backed by a strong sponsor in real estate investment manager CapitaLand Investment Limited (SGX: 9CI).
Then there’s Frasers Centrepoint Trust (SGX: J69U), or FCT, a retail REIT which owns a portfolio of nine suburban retail malls and an office building.
FCT’s portfolio comprises malls that you’ve probably frequented, such as Tampines 1, Century Square, and NEX.
The retail REIT has a reputable sponsor in Frasers Property Limited (SGX: TQ5) and paid out a distribution per unit of S$0.12042 for its fiscal 2024.
Building a stream of passive income
Armed with several ideas for REITs, you can then start to construct a portfolio of REITs that you feel comfortable owning.
As you add more REITs into your portfolio and slowly increase the size of your positions, the dividends will gradually start to trickle in.
If you just started on your investment journey, buying REITs is a great method to kick-start your flow of passive income.
This income can supplement your earned income and is useful in helping you to save more.
Kick-starting the compounding machine
As you slowly accumulate more REITs within your portfolio, your dividends should also increase in tandem.
It may have started off as a trickle, but as you park more money in well-managed REITs, the flow of dividends will turn into a gush.
You can accelerate this process by relying on an almost magical process called “compounding”.
Compounding refers to the reinvestment of the dividends you receive back into the same stocks that paid out these dividends.
A simple example will help to illustrate how this concept works.
Say you own 1,000 shares of a REIT that pays a dividend of S$0.10 per share per year.
At the end of the year, you will receive S$100 in dividends (1,000 x S$0.10).
Here’s the trick.
Take this S$100 of dividends and use it to buy more shares of the REIT.
Assume for simplicity that the REIT’s unit price is S$1.
This S$100 can then buy you an additional 100 shares of the REIT, taking your total shareholding to 1,100 shares (1,000 + 100).
The next time the REIT declares a distribution of S$0.10, you will receive S$110 instead of S$100.
The above example is compounding in action, and it becomes even more powerful if the REIT declares a steadily higher distribution over the years.
Get Smart: Slow and steady wins the race
By harnessing the power of compounding, you can turn your REIT portfolio into a source of steady passive income.
The process described above may be slow, but know that slow and steady investors will eventually win the (investing) race.
By constructing a portfolio of robust REITs and then adding to them over time, you can build up a reliable portfolio to depend on for your retirement.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
