A colleague recently told me that he has invested in a Real Estate Investment Trust (REIT) with dividend yield of 5%. With a stable annual dividend payout, it is expected to break even in 20 years.
Dividend vs Stock Price
As the income of REITs mainly comes from rent collections, its performance is relatively stable. It also has to distribute to investors at least 90% of its audited annual net income after tax as dividends every year, which makes it an ideal choice for investors seeking stable dividend income.
While many investors are attracted by the current dividend yield when selecting a REIT or dividend-paying stock, they may not realise that, like stocks and funds, past dividend yields can only be taken as reference, but do not reflect the actual future dividends. As stock price movements also affect investment returns, when considering investment returns, both dividend returns and stock price movements should be looked at.
The relationship between dividend yield and the stock price is like a see-saw: the former will rise when the latter falls. The dividend yields of REITs can be very attractive during market downturns. However, whether a REIT is a good buy depends on its dividend outlook, stock price movements and other factors that may affect its value, such as the economic environment and the quality of its property portfolio. Of course, nobody can accurately predict the future investment returns of a REIT.
