At the start of 2016, my investment portfolio was concentrated on the
Oil & Gas and Finance sectors. The Oil & Gas stocks were purchased many years ago before their sharp drop in valuation. Still, I am comfortable holding on to them for the long term (Remember to use only your spare cash for investment!). My portfolio of finance companies is made up of banks and financial institutions that was accumulated over the years.
The problem is that the business for both sectors is volatile and this translates to inconsistent annual dividend returns that fluctuates between 2.5-5%. At this stage of my life, I felt that my portfolio should offer some form of stability in its return.
Need for a “3rd Sector” in my portfolio!!
This need led to the build up of a “3rd sector” in my portfolio
with the aim of generating relatively consistent annual returns. After evaluating possible options including bonds, highly defensive stocks such as Singtel, SPH, etc, reits/trusts stood out as I believed that they are likely able to support a high and relatively stable dividends return due to their business model. However, not all reits/trusts would fit well into my overall investment strategy. My main concern for reits/trusts lies in their loan structure especially
those that pegged their borrowings to floating interest rates. Hence I came up with a set of criteria to shortlist suitable reits/trusts: (1) Hedged against potential interest rate hike risks; (2) Have business exposure in European countries and
Asia i.e. Japan; (3) Dividend return of at
least 7%; (4) Gearing ratio less than 40%.
Hedged against Potential Interest Rate
Hike?
A few years back, I felt that there is a high possibility for U.S./Europe/Japan
to raise their interest rates right after their quantitative easing. Since most reits/trusts were still primarily hinging on floating interest rates for their borrowings, they would be well-affected when interest rates rise.
The risk is high so I chose to avoid buying them altogether. Over time, my views
changed when most reits/trusts began to convert a large part of their loans to fixed interest rates. When assessing reits/trust for investment now, I would usually look out for their % of loans that are in fixed interest rates.
Europe and Japan.. Why?
Over the years, the central banks of Europe and Japan have been buying
up their government and/or corporate bonds with the aim of encouraging investors to shift into higher risk and potentially higher return investment products. These central banks also adopted a negative interest rate policy
which lead to commercial banks having to pay when they put their excess money with the central bank. This should (hopefully) spur commercial banks to lend more to private companies at low interest rates to support them to
expand their regional operations and create more jobs. Another point was that exchange rates have been favourable towards the Singapore dollar against the Euro and Yen. I see this combination of low interest rates and favourable exchange rates to be good business conditions and opportunities for Singapore companies.
Looking at Dividend Return of at least 7%...
Most reits/trusts draw their income from leasing or renting out their
facilities. As long as their facilities are rented out, they would continue to receive consistent returns. I set a benchmark of at least 7 % dividend return because any lower would make the reits/trusts less attractive than
other investment products such as high dividend companies. In addition, the 7% dividend return caters for a hypothetical 20% reduction in dividend payout; which at 5.6%, would still be acceptable to me.
Gearing Ratio less than 40%!
I prefer companies with low or no debts. Generally, I find reits/trusts
with gearing ratio of less than 40% acceptable as there is room for further increase in debt to support loan payments and business expansion, without overly straining their finances.
What have i done so far?
In line with my considerations above, I have recently bought into several
reits/trusts such as Ascendas Hospitality Trust, Ascott Reit and MapleTree Logistics Trust. It is crucial to reiterate the importance of performing your own due diligence in evaluating the risks for each of these companies to determine whether they could be
suitable for your investment portfolio. Moving forward, I will likely continue to accumulate more reits/trusts. In my next post, I will be sharing more about how I buy and sell stocks by using my “Target Price” strategy.
Together, let us all Go & Huat ah!
GoHuat
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