Published August 27, 2008
Businesstimes.com
By PAUL J LIM
IN STORMY times like these, dividend-paying stocks are supposed to excel, because their payouts provide ballast for volatile portfolios.
But dividends have been a hard sell lately, largely because of their association with the market's beleaguered financial sector.
Already this year, 21 blue-chip financial companies have cut their payouts by US$16.2 billion, a total reduction of more than 20 per cent, according to Standard & Poor's. That's up from just five that cut their dividends last year, and only one in 2006.
Moreover, as a result of the huge sell-off in the financial sector - which accounts for roughly a quarter of the income thrown off by the S&P 500 - dividend-paying stocks have lagged of late. From last Oct 1 to Aug 15 this year, dividend-paying stocks in the index lost 13.4per cent, on average, versus a 12.6 per cent decline for the stocks that did not pay dividends.
And it doesn't look as if the situation will change anytime soon. Since mid-March, there has been a major divergence in the market, with growth stocks - shares of companies whose earnings are growing faster than the market as a whole - posting positive returns, and dividend-paying value stocks falling.
Still, when it comes to dividends, investors should look at time frames significantly longer than a single year.
Historically, dividend income has represented around 40 per cent of the market's total returns. But in the 1980s, that fell to 28 per cent, according to S&P. And in the 1990s, it shrank to just 16 per cent.
But guess what? Since the end of the 1990s, dividends have accounted for all of the market's gains. In fact, without dividends, you would have lost money by investing in blue-chip stocks, based on the S&P 500.
Indeed, a US$1,000 investment in the index on Dec 31, 1999, would have fallen in value to US$871 by the end of June this year, according to an analysis by T Rowe Price in Baltimore. That's why many investors refer to the current period as the 'lost decade', as equity investments have lost ground.
But had you reinvested your dividends from that original US$1,000, your portfolio would have grown, though ever so slightly, to around US$1,005. It shows that dividends provide 'defensive protection in adverse market environments', said Brian C Rogers, the T Rowe Price chairman and fund manager.
Step back even further, and you begin to appreciate how a steady, consistent dividend stream can gradually grow into a surprisingly large source of gains, even though the yield of the S&P is now a modest 2.2 per cent. 'Two per cent may not sound like a lot, since stocks can move up or down more than that in a single day without getting written up in the papers,' said Howard Silverblatt, senior index analyst at S&P.
But over time, two percentage points make a huge difference. Since 1979, dividend-paying stocks have outperformed non-dividend-payers by 2.16 percentage points a year, based on total return. Had you invested US$10,000 in 1979 in the dividend payers - and reinvested the income along the way - you would have wound up with US$406,825 by Aug 15 this year. That same US$10,000 in non-dividend-paying stocks would have grown to just US$243,385 - a difference of more than US$163,000. 'That's real money,' Mr Silverblatt said.
A separate analysis by T Rowe Price showed that over the past 27 years - a period marked by generally falling payouts - reinvested dividends accounted for more than 50 per cent of the gains in the S&P 500, thanks to the long-term effects of compounding gains. Of course, this doesn't solve one problem. Financial stocks represent a disproportionate share of dividend-paying stocks, and you may not want to make a big bet right now on struggling banks and brokers.
Yet by focusing on companies that don't just pay dividends, but consistently increase them, dividend investors can reduce their exposure to this still-volatile sector.
The Vanguard Dividend Growth fund, for example, which invests in companies with a history of increasing their dividends and enough cash flow and earnings growth to keep doing so - recently held only 10 per cent of its assets in financials. By comparison, financial shares make up nearly 15 per cent of the market capitalisation of the S&P 500.
Or you might consider a fund that embraces financials - but only those banks and brokers that haven't cut their payouts. The SPDR S&P Dividend exchange-traded fund, for example, tracks the S&P High-Yield Dividend Aristocrats index, which is made up of the 50 highest-yielding stocks that have raised their dividend payouts every year for the past quarter-century.
Since the start of July, the fund is up 9 per cent, while the S&P 500 is up only one per cent. Perhaps it's an early sign of better days to come for dividend investors. -- NYT
The writer is a senior editor at Money magazine
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Safety in Reits? Don't count on it: analysts
Published August 4, 2008
By EMILYN YAP
The Business Times
Full article: http://www.businesstimes.com.sg/mnt/html/btpre/registration/redirect.jsp?dlink=/sub/news/story/0,4574,290579,00.html?
High yields and strong results are making real estate investment trusts (Reits) stand out in a volatile market. But there is debate over their potential as defensive plays, with some market watchers cautioning that Reits are not necessarily safer bets because of their link to the cyclical property sector.
Most Reits turned in impressive results for the quarter ended June 30, 2008. The 18 which reported their performance before last Friday all achieved higher distributable income and distribution per unit (DPU) over the same period last year.
Distribution yields reported by the Reits, based on annualised DPUs and last Friday's closing prices, ranged from 4.8 per cent to 11 per cent. Reits which offered yields above 10 per cent included MapleTree Logistics Trust, healthcare-related First Reit and Lippo- MapleTree Indonesia Retail Trust.
Overall, the Reits had an average distribution yield of around 7.8 per cent, offering a spread of over 4.6 percentage points above the 10-year Singapore government bond yield of 3.14 per cent on Friday. Compared with one-year fixed deposit rates which start from around 0.8 per cent, the Reits offered an even wider spread.
Analysts say Reits have largely performed in line with expectations. Their good performances have won them fans - with many trading at discounts to net asset values and thus offering relatively high yields, OCBC Investment Research said in a recent report that investors could 'take a fresh look at S-Reits as defensive vehicles offering stable cash flows and high yields'.
However, others pointed out that Reits still may not match up to traditional defensive plays, including high-yielding blue chips like telcos and banks. While Reits do offer high distribution yields, the sector is influenced by movements in the property market, which tends to be more cyclical compared with, for instance, the telecommunications industry, or even banking, they say.
Distribution yields are also a function of Reits' unit prices, so yields may look high simply because unit prices have dropped, explained one analyst. Considering both capital gains and distributions to investors, Reits have not done as well compared to around a year ago, he added. The FTSE ST Reit Index has fallen by more than 10 per cent since it was launched on Jan 10 this year.
Reit fans, on the other hand, argue that few sectors are completely resistant to economic slowdowns. Also, some Reits may be more resilient because they can lock in leases over several years, which helps stabilise earnings.
Where there is agreement among most of the market watchers BT spoke to is that Reits will continue to generate steady operating results. For those which have locked in leases or are able to gain from higher rental reversions on lease renewal, 'there is a lot of predictability in terms of their earnings and distributions,' said Daiwa Institute of Research analyst David Lum.
With credit conditions staying tough, however, much of the earnings growth will have to come organically. Reits may still acquire properties but they will have to be more selective, analysts say.
Analysts' top Reit picks include Suntec Reit. 'With 32.6 per cent of total office net lettable area up for renewal in FY09, we believe Suntec is well-positioned for rental reversion with current $14 psf signing rents versus passing rent of around $6.30 psf,' said a Citi Investment Research report last week.
CapitaCommercial Trust was another popular choice. Goldman Sachs reiterated its 'buy' call on the Reit, favouring its strong organic growth and 'leadership among office Reits'.
Read more!
By EMILYN YAP
The Business Times
Full article: http://www.businesstimes.com.sg/mnt/html/btpre/registration/redirect.jsp?dlink=/sub/news/story/0,4574,290579,00.html?
High yields and strong results are making real estate investment trusts (Reits) stand out in a volatile market. But there is debate over their potential as defensive plays, with some market watchers cautioning that Reits are not necessarily safer bets because of their link to the cyclical property sector.
Most Reits turned in impressive results for the quarter ended June 30, 2008. The 18 which reported their performance before last Friday all achieved higher distributable income and distribution per unit (DPU) over the same period last year.
Distribution yields reported by the Reits, based on annualised DPUs and last Friday's closing prices, ranged from 4.8 per cent to 11 per cent. Reits which offered yields above 10 per cent included MapleTree Logistics Trust, healthcare-related First Reit and Lippo- MapleTree Indonesia Retail Trust.
Overall, the Reits had an average distribution yield of around 7.8 per cent, offering a spread of over 4.6 percentage points above the 10-year Singapore government bond yield of 3.14 per cent on Friday. Compared with one-year fixed deposit rates which start from around 0.8 per cent, the Reits offered an even wider spread.
Analysts say Reits have largely performed in line with expectations. Their good performances have won them fans - with many trading at discounts to net asset values and thus offering relatively high yields, OCBC Investment Research said in a recent report that investors could 'take a fresh look at S-Reits as defensive vehicles offering stable cash flows and high yields'.
However, others pointed out that Reits still may not match up to traditional defensive plays, including high-yielding blue chips like telcos and banks. While Reits do offer high distribution yields, the sector is influenced by movements in the property market, which tends to be more cyclical compared with, for instance, the telecommunications industry, or even banking, they say.
Distribution yields are also a function of Reits' unit prices, so yields may look high simply because unit prices have dropped, explained one analyst. Considering both capital gains and distributions to investors, Reits have not done as well compared to around a year ago, he added. The FTSE ST Reit Index has fallen by more than 10 per cent since it was launched on Jan 10 this year.
Reit fans, on the other hand, argue that few sectors are completely resistant to economic slowdowns. Also, some Reits may be more resilient because they can lock in leases over several years, which helps stabilise earnings.
Where there is agreement among most of the market watchers BT spoke to is that Reits will continue to generate steady operating results. For those which have locked in leases or are able to gain from higher rental reversions on lease renewal, 'there is a lot of predictability in terms of their earnings and distributions,' said Daiwa Institute of Research analyst David Lum.
With credit conditions staying tough, however, much of the earnings growth will have to come organically. Reits may still acquire properties but they will have to be more selective, analysts say.
Analysts' top Reit picks include Suntec Reit. 'With 32.6 per cent of total office net lettable area up for renewal in FY09, we believe Suntec is well-positioned for rental reversion with current $14 psf signing rents versus passing rent of around $6.30 psf,' said a Citi Investment Research report last week.
CapitaCommercial Trust was another popular choice. Goldman Sachs reiterated its 'buy' call on the Reit, favouring its strong organic growth and 'leadership among office Reits'.
Read more!
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