By: Drizzt
I know alot of folks are fans of high yielding stocks and are heavily vested in it. If you have notice recently, alot of these high yielders are falling like flies.
What happens in such a situation? the yield gets more attractive. some good examples are MIIF, Allco REIT, Cambridge REIT, Babcock & Brown.
So do they make a good buy now? I’m still investigating the repurcussions of the subprime mess and credit squeeze and their effect to these counters.
Personally for me to be vested, I would really need a bloody large yield to make me feel safe. Even then, it might not be enough. Considerations:
- Inflationary environment will make holding high yielding counters very risky. If the rate of inflation truely picks up, even if you are holding a counter yielding 6% it will still be badly affected if the short term rates hovers around 4% and upwards. Investors would demand higher yields to hold such counters. If they are unable to do this through yield accretive business moves, their share price must move fall to compensate to achieve the market demand yield.
- Competition between securities: this has slipped my mind but a post in channelnewsasia alert me to such a possibility:
AlwaysHumble:
IMHO if someone holds BBSFF from IPO until now, the person would have made a loss on his position including all the dividend. If someone buy the counter during its rally to 1.22, he or she would have lost more. Only if you buy at the low of 0.80plus then you are still green…
The more fundamental question is why the price is dropping if the yield is very attractive. I believe all the high yielding stocks was affected by the credit crunch due to the sub prime loss. Why? Major players such as funds, financial institution such as banks have to liquidate their holdings of global stocks to raise cash. This caused the price of such stocks to drop substantially. Few months ago, investors are not asking for high returns on their investment such as convertible bonds. In fact a lot of M&A activity was done cheaply. Look at the present situation…UBS are paying 9% to GIC per annual for their investment. Morgan stanley is paying the sament to China fund. Citigroup is paying 11% (if i am not wrong) to their middle east investor. This shows that investors are asking for much higher yield in the current market.
Let me post a question for thoughts…If you are a institutional investor, would you lend your money to UBS or Morgan Stanley at 9% or buy BBSFF at much higher yield?
I am not trying to talk down the share price of BBSFF but i just want to explain the logic why the high yield of BBSSF is not able to support the share price.
Personally vested in BBSFF (net loss)
So the lesson learn is not to buy because the yield is good. Always ponder about:
- Free Cashflow strength
- Business model in future and current economic climate
- Ability to improve cashflow
- Margin considerations
My Comments:
Hi Drizzt,
I personally own a few REITs and I agree with you that yield should not be your primary concern in getting REITs.
From my experience, Opportunity Cost or like you say Free Cashflow strength is a very important consideration because REITs are usually long term stocks - usually years. Along the way, you might come upon a undervalued stock but your money is all tied up in REITs. Especially if your yield is low, and you have not yet recoup your capital, I will be face with a dilemma on whether to sell my REIT.
I come across this situation many times. While some REITs provide good yields, I now think twice because I do not want my money to be lock up unnecessarily.
Cheers
Derek
Source: Investment Moats
Genreally agree. When investing in REITs, investors should look at the investment from a total return standpoint. This means dividend yield plus capital appreciation. Unfortunately, most investors tend to pay attention only to the dividend yield factor.
However i won’t suffer from sleepness night if the Reits that i am vested in continue to suffer a fall in price. In fact i will be glad to average down my costs if the reits can demonstrate its ability to generate consistent return of 7-9% year after year. It also mean i can pick up bargain when there is price weakness.
if i stay invested throught out, i shd not be too worried abt share fluctuation.
though there are opportunity costs in holding on to reits (as there are better return elsewhere), i am happy as long as i can reap consistent return of 7-9% year every year.
Just to point out, UBS took a 9% stake does not imply they have a 9% yield. This is a flawed assumption.
BBS has good yield, but I decided against it as I do not understand the business. Hence though it has good yield, I feel the other reits mentioned are what I understand though yield is lower.
One reason as discussed above is that the inflationary and high interest rate environment are bad for high-yielding stocks.
However, the main reason is that the dividends for most of these stocks are not sustainable. The Macquarie/Babcock fund model involves paying inflated prices for assets, utilizing cheap debt to create a highly geared structure, and paying dividends out of capital which is not covered by cash flow generation. It’s a ponzi scheme that will fall apart when these funds eventually need to refinance at higher interest rates. Furthermore, the fees that are paid by the funds to the asset manager are so astronomical that it almost ensures that the investors in the funds will not achieve a good long-term return.
Don’t get caught holding these stocks when the system finally falls apart. Usually when a yield looks to good to be true, it is.