We’ve been doing quite a few macro focussed pieces the past few weeks. So I figured for this week – let’s go back to single stock level discussion. The recent rise in interest rates has provided a nice sell-off in dividend stocks (especially REITs) that has opened up interesting opportunities for long term investors. […]
The post Top 5 Dividend Stocks or REITs I may buy in 2024 – for dividend yield / capital gains (as a Singapore Investor) appeared first on Financial Horse.
We’ve been doing quite a few macro focussed pieces the past few weeks.
So I figured for this week – let’s go back to single stock level discussion.
The recent rise in interest rates has provided a nice sell-off in dividend stocks (especially REITs) that has opened up interesting opportunities for long term investors.
Based on today’s prices.
What are the Top 5 Dividend Stocks or REITs I may buy in 2024 – for dividend yield and capital gains?
Top 5 Dividend Stocks or REITs I may buy in 2024 – for dividend yield / capital gains (as a Singapore Investor)
OCBC Bank
Price: $13.75
Market Capitalisation: $62 billion
Dividend Yield: 6.0%
Price to Book Ratio: 1.17x
What I like about this Dividend Stock?
Singapore bank stocks have been outperforming of late – there’s no denying that.
Because interest rates remain high, and the economy remains resilient, Singapore banks have been performing very well.
So no list of dividend stocks will be complete without some mention of the Singapore banks.
No doubt DBS is the best executing bank of the 3 Singapore banks.
But with DBS priced at 1.7x book value, and a 6.0% dividend yield today – the question is how much of that is already priced in by the market.
Meanwhile, UOB Bank seems to be the worst of the 3 local banks, consistently reporting the lowers ROE, and also reporting a drop in net interest income the latest quarter.
OCBC is somewhere in the middle of the pack, and given it trade at a (somewhat) reasonable 1.17x book value and 6.0% dividend yield, I decided to include OCBC bank for this list.
What are the risks with this Dividend Stock?
As you can see above, UOB bank reported a 2% quarter on quarter drop in net interest income.
Which raises the question of whether this is unique to UOB, or whether it is a portend for lower profits to come for the banks generally.
Here’s US interest rates the past 30 years.
You can see that every time interest rates went up, they usually come down after.
And save for the 1995 period, every time interest rates came down – it usually meant a recession.
For the record, I completely get the argument that this time may be different because of higher structural inflation and a resilient economy – which means that interest rates can stay high while economic growth just muddles along – which could be a godsend for bank profits.
But I think it would be foolish to rule out the possibility of a mistake by the Feds that ends in a recession / surging inflation.
Long story short – yes banks are doing well, and for now they are great dividend stocks.
But don’t be blind to the macro risks, and size the position well.
Haw Par
Price: $9.68
Market Capitalisation: $2.1 billion
Dividend Yield: 4.1%
Price to Book Ratio: 0.62x
What I like about this Dividend Stock?
Yes I get that many dividend investors swear by Haw Par.
And I can see why too – this is the classic Warren Buffett kind of stock that is trading well below “fair value”.
Haw Par’s business is broadly split into 2 parts:
The core Healthcare business (selling Tiger Balm)
The ancillary investments they hold
What are the investments you ask?
Well broadly they are:
$2.2 billion stake in UOB
$450 million stake in UOL Group
That’s $2.6 billion in assets there at latest market prices, for a company that only has $27 million debt.
Given that Haw Par trades at a $2.15 billion market cap.
You’re basically buying the UOB stake at market prices, while getting everything else for free, that includes:
The $450 million UOL stake
The core Tiger Balm healthcare business
The property portfolio in Singapore, Malaysia and Thailand (see below)
So yes, I completely get that this is a Warren Buffet kind of stock.
What are the risks with this Dividend Stock?
The risk (or problem) with this dividend stock I suppose.
Is that the chart looks like this:
Despite all it has going for it, the share price has gone nowhere since late 2022.
Yes you are getting a 4.1% dividend yield while you wait, but that’s not amazing when you can get 3.75% on a T-Bill with zero risk.
The main problem is that the stock needs some kind of catalyst to unlock the value.
If Haw Par decides to distribute out all their UOB shares to shareholders for example.
Or sell some properties to dividend out the proceeds.
Those could be gamechangers.
If they don’t, this dividend stock could stay rangebound for a while.
I know some of you would argue that’s a good thing, as it provides opportunities for investors to accumulate positions.
But I’ve been investing on the SGX long enough to know that sometimes, cheap stocks can stay cheap for a long, long time.
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Keppel Infrastructure Trust
Price: $0.455
Market Capitalisation: $2.5 billion
Dividend Yield: 13.5% (including special dividend), 7-8% (without special dividend)
Price to Book Ratio: 2.87x
What I like about this Dividend Stock / REIT? (yes for the record I know this is a business trust)
I like that Keppel Infrastructure trust holds a good mix of infrastructure assets, that provide a decent hedge against inflation.
The way the macro is setting up, I suspect infrastructure assets may do well this decade, and Keppel Infrastructure Trust is one way to play this secular trend.
Dividend yield is decent too.
If you include the special dividend you’re looking at a 13.5% dividend yield.
But that’s one-off, so realistically it’s more like a 7% – 8% dividend yield.
What are the risks with this Dividend Stock / REIT? (yes for the record I know this is a business trust)
As shared in a previous article – I was not a fan of their decision to buy Ventura, the Australia bus company.
The way I see it, Keppel Infrastructure Trust has zero competitive advantage in running an Australia bus company, which is a highly operational business that requires close on the ground contact.
Worse still – they need to do an equity fundraise to finance the deal, into a market that is still quite weak.
All of this will pressure the share price in the near term.
Keppel Infrastructure Trust just provided a Q1 update.
Showing a 29.1% drop in distributable income.
Which brings us to the next issue – business trusts have a bad reputation with Singapore investors.
Remember the fiasco with business trusts like HPH Trust, Accordia Gold Trust and so on?
This horse is old enough to remember when Keppel Infrastructure Trust used to be known as CitySpring Infrastructure Trust, and how the performance has been decidedly average for a long time both before / after.
So I get why Singapore dividend investors are somewhat wary of this business trust.
Business Trusts are more like operating companies, and the way to evaluate them is very different from a traditional REIT.
For example, concepts like Price/Book are not so meaningful for business trusts, you really have to evaluate them like an operating company.
How the 29.1% drop in distributable income will affect the next distribution, it’s not so clear for now.
All in that’s quite a bit of near term headwinds.
CapitaLand Ascendas REIT
Price: $2.58
Market Capitalisation: $11.2 billion
Dividend Yield: 5.9%
Price to Book Ratio: 1.14x
What I like about this REIT?
It’s funny because I remember in late 2022 when the Fed rate hikes cycle started, I said that I would buy Ascendas REIT in the mid – low $2s.
Many investors laughed me out of the room then, and said they would back up the truck if it ever went there.
Well CapitaLand Ascendas REIT trades at $2.57 today, and the same investors are busy loading up on bank stocks instead.
The market is funny like that.
CapitaLand Ascendas REIT holds a broadly diversified portfolio of Singapore industrial property.
I want to focus exclusively on Singapore property this cycle, as I anticipate a lot of uncertainty for global real estate. Because of that my interest in Mapletree Industrial Trust has cooled quite significantly, as they are now 50% exposed to US data centres.
What are the risks with this REIT?
Ascendas REIT is reporting a 6.1% drop in DPU for 2H 2023.
This is not pretty, but it’s not as bad as some of the other REITs.
As with all REITs.
The biggest risk is if interest rates stay high.
If so, this will hit the REITs in 2 ways:
Funding costs will stay high
Will eventually pressure real estate prices (higher cap rates)
As to where interest rates will go in the next 12 – 18 months, boy that’s an entire article by itself.
The long and short is that it really could go either way – it’s going to come down to how policy makers react in the months ahead.
Because of that I think investors should hold comfortable cash levels, and position your portfolio to benefit in both scenarios (interest rates to stay high to curb inflation, and interest rates being cut to juice economic growth – you can see my portfolio positioning on FH Premium).
The way the REITs are priced, we could see meaningful upside if interest rates are cut in a big way.
But of course, if interest rates stay high REITs are going to be range bound at best (worst case there may be more downside).
Keppel DC REIT
Price: $1.75
Market Capitalisation: $3.0 billion
Dividend Yield: 5.3%
Price to Book Ratio: 1.31x
What I like about this REIT?
One word (or maybe three) – Singapore Data Centres.
Singapore Data Centres are a rare and prized asset class because the Singapore government restricts the amount of new data centres that can be built (to avoid overstressing the local electricity grid).
Yet Singapore data centres are highly sought after by technology companies because of Singapore’s high connectivity and stable infrastructure.
This has made Singapore Data Centres a rare and prized asset class.
Keppel DC REIT has dropped almost 45% from the COVID highs, which has opened up an interesting buying opportunity for long term investors to build a position in Singapore data centres.
What are the risks with this REIT?
Part of the reason for the recent decline in share price is because of the bankruptcy of the tenant in the Guangdong data centre.
This has about a 15% impact on the DPU, so the impact is not small.
No doubt this will hang over the REIT, pressuring share price in the near term.
Similar to Ascendas REIT – higher interest rates will also impact Keppel DC REIT.
We’ve discussed this above, so I won’t belabour the point.
Closing Thoughts: Top 5 Dividend Stocks or REITs I may buy in 2024 – for dividend yield / capital gains (as a Singapore Investor)
Final thought from me?
In this new regime where T-Bills pay 3.7% risk free.
Money is no longer free.
And when money is no longer free and carries an opportunity cost, this has profound implications for all asset classes across the board.
Because of that I would say price matters… a lot.
A great company bought at the wrong price can stay flat / underwater for a long time.
So identifying the right company is one thing, you also need to buy it at the right price.
I didn’t really touch on pricing in this article, but you can see my full full stock and REIT watchlist (with price targets) on FH Premium.
And given how this is a new regime of interest rate volatility.
I might even go so far as to say if the dividend stocks have run up a lot, it may not hurt to lock in some profits, and buy it back if / when the price comes back down.
But yes I know this is a more active approach that may not be suited to all investors.
So it really goes back to the kind of investor you are.
You can see my full portfolio on FH Premium, where I provide regular updates when I buy / sell stocks or REITs (or if I change my mind on a stock or REIT).
I also share my full stock and REIT watchlist on FH Premium, together with my price targets.
This article was written on 10 May 2024 and will not be updated going forward.
For my latest up to date views on markets, my personal REIT and Stock Watchlist, and my personal portfolio positioning, do subscribe for FH Premium.
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Last weekend to enjoy the sale – find out more here.
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We’ve been doing quite a few macro focussed pieces the past few weeks. So I figured for this week – let’s go back to single stock level discussion. The recent rise in interest rates has provided a nice sell-off in dividend stocks (especially REITs) that has opened up interesting opportunities for long term investors.
The post Top 5 Dividend Stocks or REITs I may buy in 2024 – for dividend yield / capital gains (as a Singapore Investor) appeared first on Financial Horse.
