Higher Interest Rate Means Dividend Investing Becomes Better

Market is churning news on how with the rise in interest rates, stocks are going to go lower. 

While it is indeed hammering and lowering stock prices; what if we take an alternative point of view? With higher interest rates (a higher expected rate of return), the lower stock prices means dividend yields are now higher, especially in the REIT sector. If one is a new dividend investors, the yields we are obtaining is now of a higher return than before.

REIT Share Prices have Stagnated

Despite Singapore's reopening, many local REITs' share prices have stagnated nor moved up much. This is due to the worldwide trend in interest rates hikes which brings about a higher  rate of return demanded for holding dividend stocks. As a result, many REITs are now trading at 6% dividend level (e.g. Suntec is 6.2%), an increase from the past where there were at 4-5% levels.

So how do new investors come into the equation? Put it simply, in the past, investors were invesing in REITs which command a 5% yield; now the same REITs goes for 6% yield. Underlying properties behind the REITs have not changed much and the rental escalations are keeping pace with the rise in interest expense. Suntec REIT is an example where the reopening theme has seen diviends grow but its share price stagnate. The result is that the REIT's dividend yield has grown from the 5% to 6.2%.

Dividend Investor Paradise

For dividend investors, a $100,000 porfoilo will now nett approximately $6,000 in dividends as compared to $5,000 in dividends before.

Looking from the perspective of a "salary", you are getting a 20% pay raise due to the higher expected returns investors are demanding from stocks. Having a 20% pay raise is definitely a rare occurrence for many of us, so the increase in dividends is Paradise!

The Maths of Early Retirement

Mathematically with higher dividend yields, it is now easier for us to replace our work income with dividends. The maths as below:

Current Work Income= $100,000

Few years back (5% Dividend from REITs), amount needed to replace current work income (divided by 5%) = $2,000,000 porfoilo

Now (6% Dividend from REITs), mount needed to replace current work income (divided by 6%) = $1,666,667 porfoilo

In summary, one needs a smaller portfolio now.

Risks Involved

One risk is the increase cost in financing but as said, many of our REITs have experienced postivie rental escalations as well which more than offset this. Hence, I feel our local REITs are relatively okay. Secondly, while a downward revaluation will occur, most of our local REITs leverage ratio is far below the regulatory limit of 50%, so it is safe to say this is not a threat/risk unlike in the case of Manulife REIT

My view

With the rise in interest rates, it is a definite joy for REIT investors because the same amount of money invested gets more dividends. Personally, I have started REIT investing albeit in the higher risk US commercial REIT space. 

For others, the era of high yields for REITs its starting and if one intends to retire early, it may be an opportune time to start investing in our local REITs again as less money is needed to replace your current income flow.