Applying the Chowder Rule metric to S-REITs

In today's post, I will not show you where to get the tastiest, most value-for-money Chowder in Singapore. That is.......the responsibility of food bloggers.

....Not today's subject

Instead, I will introduce you to the Chowder Rule, so named after Chowder, a Seeking Alpha contributor. I will be lifting several paragraphs from an article by Sure Dividend on the same topic:

The Chowder Rule is a rule-based system used to identify dividend growth stocks with strong total return potential by combining dividend yield and dividend growth. The Chowder Rule is applied in a differentiated manner depending on the type of stock in question. The criteria can be found below:

Rule 1: If a stock has a dividend yield greater than 3%, its 5-year dividend growth rate plus its dividend yield must be greater than 12%.

Rule 2: If a stock has a dividend yield less than 3%, its 5-year dividend growth rate plus its dividend yield must be greater than 15%.

Rule 3: If a stock is a utility, its 5-year dividend growth rate plus its dividend yield must be greater than 8%.

For those who are interested in the details (its underlying philosophy, when to use it, its limitations, etc), you can read more of the Chowder Rule here.

The first thought that I had when I came across the Chowder Rule a couple of weeks back was to apply the metric to S-REITs. The rationale is to add another tool to my investment toolkit to help me differentiate whether does a particular REIT make the cut.

As you can see, all 3 rules do not make explicit allowances for REITs. Hence, I took the liberty to select Rule 3 and apply it to S-REITs (based on the assumption that REITs and utilities share similarities such as being higher-yielding, lower growth/dividend growth instruments).

I then realized that there might be certain REITs who could "pass" the Chowder Rule 3 of 8% just for being higher-yielding. Perhaps, in our situation, we could use the Chowder Rule not as a binary measure (e.g. above 8% = good; below 8% = bad), but as a a relative measure (e.g. REIT A has a higher score than REIT B).

In the calculations that follow, annual dividends will be defined as the total dividends distributed by any given REIT in their financial year, not the calendar year. Special dividends, if any, will be included in the computation of dividend growth. Data will be taken from the most recent annual report. Current dividend yield will be taken from the REIT Data site at the time of this blog post (30 October 2018).

With d referring to total dividends distributed in the financial year and y referring to the current year, let 5-year dividend growth rate be:

((d_y - d_y-1)/d_y-1+(d_y-1 - d_y-2)/d_y-2+(d_y-2 - d_y-3)/d_y-3+(d_y-3 - d_y-4)/d_y-4+(d_y-4 - d_y-5)/d_y-5)/5

I won't be calculating the Chowder Rule for all the REITs; I will only be looking at a select few REITs.

AIMS AMP Capital Industrial REIT
5-year dividend growth rate: -1.12%
Current dividend yield: 7.741%
Chowder Rule value: 6.62%

Ascendas REIT
5-year dividend growth rate: 3.08%
Current dividend yield: 6.272%
Chowder Rule value: 9.35%

Capitaland Commercial Trust
5-year dividend growth rate: 1.56%
Current dividend yield: 4.767%
Chowder Rule value: 6.33%

Capitaland Mall Trust
5-year dividend growth rate: 3.42%
Current dividend yield: 5.264%
Chowder Rule value: 8.68%

First REIT
5-year dividend growth rate: 3.39%
Current dividend yield: 7.142%
Chowder Rule value: 10.53%

Frasers Centrepoint Trust
5-year dividend growth rate: 3.56%
Current dividend yield: 5.586%
Chowder Rule value: 9.15%

Keppel REIT
5-year dividend growth rate: -5.92%
Current dividend yield: 5.062%
Chowder Rule value: -0.86%

Lippo Mall Trust
5-year dividend growth rate: 3.66%
Current dividend yield: 14.044%
Chowder Rule value: 17.70%

Mapletree Commercial Trust
5-year dividend growth rate: 6.94%
Current dividend yield: 5.644%
Chowder Rule value: 12.58%

Mapletree Industrial Trust
5-year dividend growth rate: 4.94%
Current dividend yield: 6.194%
Chowder Rule value: 11.13%

Mapletree Logistics Trust
5-year dividend growth rate: 2.16%
Current dividend yield: 6.252%
Chowder Rule value: 8.41%

Parkway Life REIT
5-year dividend growth rate: 5.63%
Current dividend yield: 4.773%
Chowder Rule value: 10.40%

Sabana REIT
5-year dividend growth rate: -17.65%
Current dividend yield: 8.329%
Chowder Rule value: -9.32%

Starhill Global REIT
5-year dividend growth rate: 0.99%
Current dividend yield: 6.977%
Chowder Rule value: 7.97%

Make what you will of these figures. Have fun!