Case Studies: Dividend Yield And Dividend Payout Ratio

Following the blog posting on Dividend Yield and Dividend Payout Ratio last week, we have singled out 2 stocks to discuss these 2 ratios further.

StarHub

The second-largest telecommunications and dominant Pay TV operator inSingapore, StarHub operates integrated fixed and mobile telecom services, as well as Internet-related services, mobile solutions and global managed network solutions.

Source: ShareInvestor.com

Trading at $2.860 currently, the dividend yield of the stock is in the range of 5% to 7% over the last 5 years providing investors an attractive return in the form of cash dividend. This compares favorably to other companies in the Straits Times Index (STI) which is paying an average of 2.9% as shown on the Sector Comparison table above.

Source: ShareInvestor.com

Source: ShareInvestor.com

Despite the history of growing annual dividends as shown on the Dividend History table, the high dividend payout ratio of above 1.00 raises concern about the sustainability of the company maintaining current high level of payout over the longer term considering that the company is paying more dividends beyond its earnings for the year. This means it is drawing upon its retained earnings from past years to sustain the dividend payments. Simply put, the higher the dividend payout ratio, the lower the dividend cover (Annual Earnings Per Share / Annual Dividends Per Share). A higher dividend payout ratio alongside a lower dividend cover is only acceptable where the demand for the company’s services and hence earnings from its ordinary course of business remain resilient even in times of economic downturns or slowing economic activity.

AIMS AMP Capital Industrial REIT

Another popular asset class among income-oriented investors is Real Estate Investment Trusts (REITs).

REITs are collective investment schemes that invest in a portfolio of income-generating real estate assets and are usually established with a view of generating income, primarily rental income, from these assets to be distributed at regular intervals to unitholders who purchases units of the trust, similar to shares of an ordinary stock. Unlike listed companies where there are no requirement to distribute dividend from their accounting profits, REITs are required to distribute at least 90% of its profits to enjoy tax transparency under Income Tax Act. To this end, REITs typically offer higher dividend yields in comparison to the broader market as represented by the Straits Times Index (STI) as reflected under the Sector Comparison table below.

Source: ShareInvestor.com

Despite the higher dividend yields, investors should bear in mind that investment in REITs are not entirely without risks. “Reit or Business Trust” (The Business Times Weekend, 30 April – 01 May 2011) gives you an overview of the structure of REITs, Business Trusts and Listed Companies as well as the risks involved in investing in REITs and Business Trusts.

Do note that for REITs, we use the term “distribution” instead of “dividend”. Hence the terms “dividend”, “dividend yield” and “dividend payout ratio” are referred to as “distribution”, “distribution yield” and “distribution payout ratio” respectively.

Let’s have a look at AIMS AMP Capital Industrial REIT which invests primarily in industrial real estate assets comprising mainly warehouses and logistics in Singapore. The Trust’s distribution policy is to distribute at least 90% of the Trust’s taxable income for the full financial year.

It is trading at $1.00 with an annualized distribution yield of 10.3% computed based on its last reported 3rd Qtr ended 31 Dec 2011 results. Assuming the REIT can maintain its distribution payout over the next few years, an investor who buys into this REIT can recoup all of his original capital within 10 years. Such high distribution yield is currently supported by the strong and stable stream of cash flow from its portfolio of rental yielding properties at near full occupancy rate of 98.9%, with an average security deposit per property of approximately 8.4 months and weighted average lease expiry of 2.6 years. However with only physical presence in Singapore’s industrial property market, this may pose possible risks to the REIT in the event of slowing market activity.