Tuesday, October 30, 2018

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:

((dy - dy-1)/dy-1+(dy-1 - dy-2)/dy-2+(dy-2 - dy-3)/dy-3+(dy-3 - dy-4)/dy-4+(dy-4 - dy-5)/dy-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!

Wednesday, October 10, 2018

Q3 2018 Portfolio Update

Another quarter has passed and it is time to review my portfolio again.

Dividend Income

Q3 2018 SGD Dividend Income

Dividends received from my SGD-denominated portfolio in Q3 2018 fell, when compared to the same quarter last year. This trend has persisted for quite some time and it is symptomatic of deeper issues that my portfolio is somehow not quite right. Shouldn't an income investor receive more dividends through the passage of time? With some psychic pain, I persisted in my task of pruning the fundamentally weaker stocks from my portfolio. The drops in dividends received should stabilize in another quarter or two.

Q3 2018 USD Dividend Income

On the other hand, the dividends received from my USD-denominated portfolio is growing steadily, a result from both capital injections into dividend growth stocks and dividend growth from said counters. 

In this quarter, I initiated a new and small entry into OCBC when its price fell from its peak. With this move, my portfolio has some exposure to the financial sector again (after divesting iFAST, Hong Leong Finance, and T Rowe Price previously).

I exited my entire position in Lippo Mall Trust and Accordia Golf Trust in this quarter. Previously, I have taken partial profits for these two counters when they were at their highs. This time round, I exited the remaining stake for both at below my cost price. Overall, these two trades turned out profitable.

An investment blogger friend sounded out to me that there were some flaws in my thinking and I am grateful for that. Specifically, what I intended to do with regards to Lippo Mall Trust was to shrug off any unrealized losses as I got them at a (formerly) very low price of $0.30. Since I have taken partial profits at $0.40 and have received almost 3 years' worth of dividends, I was willing to hold it through a market crash coupled with its deteriorating fundamentals. I was even contemplating to buy more in a market crash. Somehow, the following thought eluded me: some counters go down..........and stay down. Okay, now I know better. Thanks friend!

As for Accordia Golf Trust, the dividend trend is not looking good. 

I added to my position in Hongkong Land. Nothing much to be added here; I like the recurring income from their investment properties and their clean balance sheet. To quote a friend who aptly described my position, I am treating Hongkong land as an un-levered REIT income play.

I also added to my position in JM Smucker. Despite the challenges faced, JM Smucker is still going strong (relative to its consumer staples peers). Looking to scale in further if opportunities present itself. 

Net worth breakdown
There has been minimal changes to my net worth breakdown when compared to the previous quarter.

Net Worth Breakdown

As per before, "the pie chart depicts the breakdown in my net worth across the various asset classes in percentage (pie chart neither includes my CPF nor my emergency fund). To be conservative, I computed my precious metals allocation at spot price even though I am holding everything in physicals."

Emergency Fund
On the ground, things don't really look good. Based on anecdotal evidence, I have heard of contracts not getting renewed and retrenchment exercises taking place.

At my end, I have continued to build up our emergency fund each month. I mentally segregate the emergency fund from investable cash. That way, in a real market crash cum recession, my mind will be free to operate in a cold and clinical fashion.

Strategy moving forward
In the interim, I am exposing myself to opportunities in other markets.

I have created a trading account to trade Hong Kong stocks and another trading account to trade Singapore stocks (in the event that my main Singapore trading account fails when everyone is trying to exit their positions in a market crash).

I will be creating a Malaysia trading account and a Denmark trading account soon.......after I am done with reading up on the rules and regulations.

If this is the calm before the storm, I appreciate all the time I can get to research stocks, re-confirm my choices, build up my emergency fund and my cash levels.