High yielding business trusts: A discussion.

I was sorting out my preparation notes for my presentation at Invest X Congress on Saturday and found an article published in Channel NewsAsia which I printed out on 10 June 2014, just 4 days before the event.

I had meant to share this at the event but I totally forgot about it. It was in my folder all along. Growing old and forgetful. I consoled myself by saying that even if I had remembered, I wouldn't have had the time to talk about it. Anyway, I will talk about it in my blog.

The article was about business trusts and it said that "dividend yield payouts are a key factor to consider."

Then, a consultant went on to say "If you want to invest in business trusts, you shouldn't be looking so much at capital gain... your objective is more dividend yield. Prices do come down, but you actually still get your dividend yield.

"As of today, we're looking at some business trusts giving more than 10 per cent yield, of course at higher risk, but if you think that the risk is manageable, it's actually quite attractive at this point in time."




I wrote a few reminders to myself:

1. Dividend payouts are a key factor to consider, not the only factor. Indeed, it is not the only key factor either. Note that they used the indefinite article "a" and not the definite article "the". We have to look at other factors too. For example, how highly geared is the business trust. What kind of debts does it have and how are they structured?

2. When we invest in business trusts or in any asset with an eye to generate income, we should also keep an eye on possible capital gain or loss. It is possible to have our cake and eat it too which is sweet. It is also possible that we could lose a big chunk of our capital even as the investment distributes money regularly to shareholders.




3. If we say that we still get our dividend yield even if prices were to fall, it would be true if we were to base our calculations on our entry prices. Well, we can do this if it matches our motivation for being invested. However, doing this is not useful in helping us to decide whether to buy more or to sell some. We should look at the yield on our investment based on current day prices so that we can manage our capital more efficiently.

4. Does it make sense to invest in a business trust that delivers a constant dividend yield on our cost while its unit price keeps dropping over time? Could it be that we are taking back our own money? So, is the dividend actually a partial return of capital? So, we have to ask if the business trust is becoming less valuable over time? Prices do come down and even if we still get our dividend yield, we have to ask why.




5. When something is riskier to invest in, we should demand a higher yield to compensate for the risk which we are asked to undertake. How do we know if the yield sufficiently compensates for the higher risk? How do we know if the risk is manageable? Is the investment within our circle of competence to make such a call? So, although the consultant says that there are riskier business trusts available that offer more than 10% in dividend yield which is attractive at this point in time, we have to decide if these are suitable for us.

Motivations and methods in investing.

Understand also that what risk is acceptable now might not be acceptable in the future. So, to make things simpler, it might be a good idea to simply to go for investments which have much lower levels of risk and yet deliver decent dividend yields to shareholders.

When we invest for income, we must have certainty of regular distributions. Ideally, the dividend paid out regularly to shareholders should be sustainable and our capital should stay intact. It is about the investment having good fundamentals and it is about us getting in with a margin of safety.

When we read any investment related publication, it is important to do so with a questioning mind. Don't take anything anyone (including me, of course) say at face value.




Related posts:
1. Invest X Congress: Q&A.
2. Rickmers Maritime Trust: 1 for 1 rights.
3. CitySpring Infrastructure Trust: Rights issue.
4. K-Green Trust: A bad investment?
5. High yields: Successes, failures and the in-betweens.
6. HPH Trust: Storm clouds over a safe harbour?
7. Croesus Retail Trust and Perennial China Retail Trust.
8. Portfolio review: Unexpectedly eventful.