Dividend stripping helps S-Reits outperform market: UOB-KH

Singapore

Buy real estate investment trusts (Reits) before the dividends - normally referred to as distributions - are paid and hold them for a while after the payout, brokerage UOB Kay Hian recommended on Wednesday.

"Contrary to the efficient market hypothesis, empirical evidence shows that the dividend-stripping strategy has enabled Singapore Reits to outperform the market 62 per cent of the observed times, yielding excess returns of 1.4 per cent," analysts Vikrant Pandey and Derek Chang said.

The excess returns here are total returns measured relative to the Straits Times Index (STI), including dividends.

Dividend-stripping refers to a strategy of capturing the dividend and going on to make a capital loss when the shares fall in value on ex-dividend.

It has been shown in many cases that the net outcome may still be profitable as the share prices of some companies tend to fall by less than the dividend amount.

In other times, they also recover the value of the dividend - maybe more - within a matter of weeks, at which time they can be sold at a profit.

Using this strategy, the two analysts' data identified Mapletree Industrial Trust, Parkway Life Reit and Mapletree Commercial Trust as standouts in terms of outperforming the market with positive returns.

With the majority of Reits poised to pay out dividends this quarter, the duo examined the dividend-stripping strategy of buying during the cum-dividend period and selling after a Reit goes ex-dividend.

They evaluated over 600,000 period scenarios for which investors could enter and divest of individual Reits during the 30-day period before and after ex-dividend dates.

They also considered Reits with a significant dividend history, so those that made their maiden dividend payouts less than three years ago (eg Keppel DC Reit, Frasers Hospitality Trust) were filtered out. It also excluded Reits with an overseas focus (eg CapitaLand Retail China Trust, IReit Global).

Their findings found that during periods when Reits outperformed the STI in total returns, the market's historical relative gain was 4.5 per cent, while the loss was 3.8 per cent.

During periods of upcycle (when Reit prices were on an uptrend) and downcycle (vice versa), relative returns came to 2.0 per cent and 0.6 per cent respectively.

"Mapletree Industrial Trust, Parkway Life Reit, and Mapletree Commercial Trust stand out as they have historically outperformed the market 76.5 per cent, 68.5 per cent and 66.7 per cent of the observed times respectively since their first dividend payouts," the report said.

"They have yielded average relative market returns of 2.9 per cent, 2.7 per cent and 2.3 per cent individually during the stipulated period."

The proviso is that past performance is not necessarily an indicator of future outcome.

Depending on whether investors want a higher probability of making a profit, or the highest return possible, the analysts also recommended different lengths of holding periods.

On average, going by historical performance, if investors are looking to make the highest gains, they should hold a Reit for 44 days (buy 21 days before ex-dividend and hold for 22 days after). They would then have a 71 per cent chance of making a profit, and enjoy relative returns of 3.2 per cent.

But if investors are looking for just higher odds of making a profit and don't mind sacrificing some returns, a shorter holding period of 23 days (buying 14 days before ex-dividend and selling nine days after) may work better. They would have an 82 per cent chance of succeeding, even if their relative returns is lower at 2 per cent.

The reason why a longer holding period would yield a higher return is that it would lead to a better investor understanding of the Reit and the unit price would hence better reflect the prospects of the company, especially with the help of events like analyst briefings and management guidances that occur after the dividend distribution date.

Unlike several other brokerages, UOB Kay Hian is "overweight" on the Reit sector. It said: "We believe concerns over a rise in interest rates have been overblown. S-Reit yield spreads remain the most attractive regionally, with upcycle yield spreads indicating over 38 per cent upside potential."

Its top picks are "deep value and diversified Reits" like Ascott Residence Trust, CapitaLand Commercial Trust and Mapletree Logistics Trust.