My Dividend Portfolio

I started building this portfolio 18 months ago.  Its been a wild time!  From an "high-and-dry" market in late 2019, where I'd be desperately scrounging around for something to buy like an animal in the desert, to the liquidity crunch in March, where you would buy something a deep value, get punched in the face by Mr Market dropping it 10% in a few days, then repeat again...to the breathtaking recovery which no one believed.  

I was lucky that covid occured when it did.  If you can't build a portfolio when a once-in-50-year pandemic occurs and the end of the economic cycle, you never will.  My timing wasn't great.  I only bought 10% of my portfolio in March.   You can make a lot of mistakes in this business, but as long as you manage risk and don't buy shit that goes to zero, you'll make more than you lose.

My dividend portfolio is now worth SGD 670K, after the last few weeks market hiccups, and can probably pay me SGD 2.7K per month.  Here it is:

What next?

• Keep grinding away at my day job, plow all my salary back into the market.  Its still fairly valued, I can find things with a 5% yield.  No need to time the market too much.
• The portfolio is weighted heavily towards Singapore REITS.  Try to diversify away from this.
• Reits and Utilities weight it heavily towards companies that benefit from low rates.  At some point of the economic cycle, we start expecting higher rates.  Look to buy dirt-cheap banks to balance this out.  "Neither a borrower nor a lender be."
• Keep learning to trade.  I have a small trading portfolio (~SGD 120K), where I learn to trade by following Hedgeye.  Commodities look like a good bet now.  There may come a time when I can't add to my dividend portfolio (like late 2019), and I may need to learn to trade at different points in the economic cycle.

Dividend stocks: My first big bet

I bought a lot of Netlink Trust and a little Manulife US REIT in the last few weeks.  Enough to give me around SGD 6K of dividends a year.

Now I've got 70,000 shares of Netlink Trust at an average of 85.4c, and 26,800 shares of Manulife at an average USD 0.861c.

Why did I pick these stocks?

• Netlink Trust is a defensive counter, one of the few whose earnings would be unaffected by a recession. And still (barely) trading at a reasonable yield.  Long term, its residential revenue should follow the growth in Singapore household formation.  Its Non-Building Access Point's (NBAPs) should grow with internet-of-things/smart-city coming now, and 5G coming later.  I can't see any disrupting technology on the horizon, though I need to remind myself to keep a lookout.
• Manulife US Reit is developing a good track record after listing on SGX.  It is trading at a decent 6% yield with freehold buildings, unlike local REITs trading at a sub 5% yield with leasehold properties.  The risks are a recession (affects all stocks/REITs), and tax law changes (affecting any US-property REIT listed overseas).

Why did I buy now?

           Scared of missing out.

           Netlink Trust shot up on the day I placed my largest order, and I missed it.  Strong enough that my broker said it would unlikely come down that day.  After thinking about it: I am buying the income stream.  I'll still be happy if I buy at a higher price, and it comes down later, as long as I collect my dividend.  I'll be unhappy if I miss it now, and it never comes down again.  Which is unlikely, but possible - look at Vicom.  There's very few stocks giving a 5+ % yield that would also be unaffected by a recession.  The market was still offering me the chance, so I bought it.  Never regret.

The market narrative now is all sunshine and rainbows, especially for dividend stocks.  The Fed is expected to cut rates.  Worst case - for someone like me shopping for dividend stocks - is that this narrative goes on for another year.  Until the either the economy starts expanding, goosed by low rates, or we do finally get a real recession.

I am now 60% invested.  I don't feel the need to buy anything else this year, but can do so if the market drops.  December showed how quickly the narrative can change.  I am waiting.

Frasers Logistics and Industrial Trust (FLT)

The Properties

FLIT has 60 industrial properties.  By value:

• 2/3rds are in Australia.   2/3rds of those are in Sydney & Melbourne.  Minimal exposure to Perth (1 property, or about 7% of the Australian properties' value).
• 1/3 are in Germany and the Netherlands

The Australian buildings seem to be mostly small, generic light industrial buildings, with a few large warehouses (5-6 buildings).

The European buildings are large Logistics or Industrial buildings.

None of the buildings seem highly specialised.

70% of the properties by value are freehold, and another 21% have a lease of over 80 years.

The Australian Property Cycle

Varies by city and within parts of a city.

• A 2019 Moodys Report expects Western Sydney Industrial property prices to rise, due to online shopping and new infrastructure.
• A Centuria Industrial REIT (ASX:CIP) presentation shows available space declined up to Oct 2018.

To know about the cycles, you really have to be an expert on the land supply in different parts of the cities.  And predicting future demand is just guesswork.

Tenant Quality

Generally good.

FLIT lists all their tenants (how many REITs do this?).  I categorised each tenant, trying to guess their ability to pay rent in a recession:

• Reliable: Is either part of an oligopoly (eg: Coles, Woolworths), government (eg: Australian Post), or listed (showing profits for the last 2 years and reasonable debt).  In essence, no way that they would not pay rent.
• Unknown: Private companies (eg: BAM Wine Logistics, Caprice, Broetje Automation).  Even though some of them sound interesting, there's no way of knowing how profitable they are.  Most companies in the world are going to be here.
• Dodgy: Currently loss making.  So when times go bad, we can expect the company to go under.

Each category, by gross revenue (Sept 2018):

Overall, this is a pretty high level of 'reliable' companies.  If you pick a random street or industrial park to walk through, you are not going to see such a high proportion of 'reliable' companies.

The two dodgy companies are CEVA Logistics: a merger of two loss making companies which is still loss making, and Constellium: an aluminium product manufacturer with borderline profits/losses and large debt.

CEVA is a worry: they are one of FLIT's top 10 clients.  They are renting a massive warehouse in the middle of nowhere - this may be difficult to lease out again, and buildings like this are valued by their lease (...no lease, no value).

But overall, tenant quality seems quite high.

Management Quality

Sponsor Holdings: Frasers Property, holds 20% of the trust.  I haven't looked at enough REITs to see how this compares.

Management Fees (p146): 0.4% of property value as base fee, plus 5% of distributable income.
Seems reasonable.  Would be better if the fee was based on DPU.

Most management fees are paid in units: at least 85% in 2018 (note 5) and 91% in 1H19 (p10).

Trust expenses were very high in 2017, but lower in 2018 (p158).  They were 8.6% and 1% of distributable income, respectively.  I found no explanation on what these expenses were.

Pipeline: ROFR for 17 Australian properties and 29 European properties.

Past Acquisitions have been OK:

• In July 2017, 7 Australian properties were acquired.  A small number of units were issued, plus debt (pp 53-54).
• In May 2018, there was a large surprise acquisition of 21 European properties.  Funded by issuing 484m new units (an increase of 31%), mostly by private placement with some preferential offering.  Borrowings doubled, and leverage increased from 29% to 35%.  Accretive to those who subscribed.
• In November 2018, a single European property was acquired.

The numbers

Gearing Ratio is now at 35.1%.   No perpetual bonds.

Debt Expiry: They have a large chunk of debt due in 2021:

They did mention their intention to refinance the (grey) European debt (currently at 2% interest) with a lower rate later.  But I think they should space out their debt a bit more.

79% of their loans are fixed rate (p5), or protected by swaps for the lifetime of the loan.

Unencumbered buildings: (In Sept 2018 AR, footnote 10) The secured bank loans are secured over investment properties with a total carrying amount of A$969,554,000 (2017: A$Nil).  So out of AUD 3bn worth of property, 2bn is unencumbered.

They have always had 100% dividend payout ratio.

Valuation

Other Risks:

• Kyith Ng highlighted that many of their Australian rents were above market rate during hte IPO (June 2016).  I am factoring in a AUD 3-4m income to be lost because of this.
• AUD has dropped a lot recently, I am factoring in a rate of 1 SGD to 0.9 AUD.  Same as the global financial crisis.  Assume no change in EUR/SGD exchange rate.

For a target 6% yield, I would value the stock at SGD 1.10.

Dividend Portfolio

Inspired by posts like this and this, I've decided to slowly start a dividend portfolio.  I'm looking for stocks with a 6% yield -  the hard part is to judge if its sustainable.

I aim to buy SGD 8K worth of stocks per month for the next 3 years.  Plus a little more when I get my bonus.   This should give me a 300K portfolio in 3 years, with an income of 18K per year.  I expect a serious downturn in the next few years, which would make me buy faster.

I've started with:

• Cromwell Reit (10,000 shares) - not great, but had an 8% yield which is probably sustainable.
• Netlink Trust (12,000 shares) - low yield, under 6%, but very stable.  I can't see any threat from 5G, and NBAP revenue may grow from IOT.
• Manulife REIT (6,800 shares) - 6% yield, US economy still looks strong, the main risk is taxation (resolved for now, but always in the background).  Impressive Management.  [Update 21st May: Bought another 7000 shares]

Should give me enough dividends for kopi everyday.

Some REITS I've looked at but haven't bought:

• IREIT Global main tenant seems to be in long term downsizing.  Too bad, its good otherwise.
• CapitalMalls Malaysia Trust has reasonable 7% yield, as the Malaysian Retail market is currently oversupplied - could I buy for a cyclical upswing?  I decided not to as 1) The only players that seem to maintain their advantage are the 5 premier malls with 1m+ square feet.  Although CMMT's Penang's Gurney Plaza is good, it is not unbeatable.  2) Small, mixed use malls and individual strata malls are disadvantaged.  So why did CMMT buy Tropicana (mixed use) and Sungei Wang (strata)?  As mall operators they should know these problems, especially as they've seen it play out in SG before.  Why such stupid acquisitions?
• Singapore Industrial REITS have high yields, but are paying out 100% of their distributable income, even as they have short leases.  So you need to deduct 1 to 3 percent from the yield to get the 'true' long term yield.

I'll look at Frasers Logistics and Industrial Trust next.  Maybe Malaysia later - there may be some lower priced REITS there, as their industrial, office and retail property sectors are in a property glut.