The paradox of yield

In investing, people often seek a high yield. The equation of a yield generally means the annualised payout divided by the price of the asset.

The higher the yield the better. True or false?

Answer: It depends.

More accurately, it depends on the hat you are wearing. Are you a bond investor or an equity investor

If you are a bond investor or a lender and you can safely ascertain that no defaults or losses will be incurred, the higher the yield, the better. This is because you are on a fixed payout and a final bullet payment of principal at the end.

If you are an equity investor. Then it truly depends. For two key reasons. Equity investors earn by two methods, capital gain and dividend payouts.

• A high yield gives a high payout return but makes it difficult for managers to hunt for new assets to grow the pie.
• A low yield gives a low payout but makes it easier to find yield accretive assets.

And truth be told. With over 12 years of investing experience in anything from penny stocks to blue chips to indexes and bonds and foreign stocks...The secret sauce lies in this. 

Dividend growth. The best stocks are the one that grow its DPU or DPS year in and year out. Even better if they didn’t have to raise more capital for that.

So in that case. It is really a no brainer for reits that are able to grow their dpu both organically (rental reversions/ create new rental space / Govt measures to increase plot ratio etc) and inorganically through acquisitions of new assets:

For that reason. The low yield environment makes it the right time for sponsors to divest. In fact they would be foolish not to. This explains the record 2.3bln raised, highest since 1999 https://www.businesstimes.com.sg/real-estate/singapore-reits-going-on-a-record-fundraising-spree

And we are not done with the year yet. Q4 has only just begun...

Here are the perspectives:

1. It is definitely ripe time to sell assets for sponsors given the very optimal price as a result of yield compression. As markets price for a lower yield, the price of assets goes up.

2. It is definitely suboptimal to put your money in negative yield assets or zero yield assets. Investors therefore have to buy assets in the struggle for financial freedom.

Which is a fantastic thing because suddenly the good old DBS brought in so many USA based assets. Truly the right time for the right product.

Nevertheless, not all products are the same and we should continue our selections with extra vigilance.