A scan of the Dividend Stock Tracker would show that dividend yields have come up from the frustrating low level.
But the situations have changed somewhat. We may be in a situation most investors today have not seen before: a persistently higher interest rate.
Aims Amp Industrial REIT
Ascendas India Trust
Religare Health Trust
When stocks fall, it could be due to systematic or non-systematic factors, that is an overall market correction, or factors that affect future profitability in the long run or making the company a going concern.
Assessing risk and finding value
The job of the investor is to access risk always. Why? because for most part, there might still be a reward at the end of the tunnel.
At the worse case in the 2009 financial crisis, you have hedge fund managers buying mortgage backed securities, and so called insolvent banks.
when it looks like the municipal bonds were having an issue, there are guys that are buying municipal bonds
Those to the lay man are toxic!
But this world pays those who have built up knowledge and can form a model of the asset and the known and unknown risks of assets.
When you are able to create that box, you can find a better value for it.
At certain point the price provided gives you a good margin of safety and a good risk reward.
The difficulty is finding the value.
If you say heck care and buy, then I hope you have all the luck on your side.
Many took the easy route and just look at the yield and don’t want to learn this second job.
In this case Aims Amp at 1.60 or First REIT at 1.2 dollar may be the right price to buy since they “formed a base there for some time”.
The deeper thought process
The general consensus is that such a high interest rate scenario is bad for interest rate sensitive stocks.
The deep thinkers would have develop a second level of thoughts:
- Historically how has REITs and Utilities performed in a high interest environment?
- Is this an overreaction from the market? What if it is?
- Does interest rate just go straight up in the straight line?
- Would better managers be able to operate in this more challenging environment? Who are the better managers?
- Which REIT reacts better to this scenario, are there historical evidence of it?
- What is the worst case scenario of the 10 year SGS bond yield based on available data. what would operating conditions look in that case
- Can a REIT realistically grow if the economy is better? Does the Singapore economics conducive for such a case to happen?
- Would a strong sponsor mitigate borrowing challenges as they can obtain the cheapest rates due to their scale?
- Are certain stocks spread wide enough that historically interest rate is a non factor?
- Could certain REITs be affected because its not JUST the rates but geo-political and currency factor?
Having a systematic risk identification process will enable you to funnel these into your valuation model.
Good luck in your bargain hunting. Lets hope it doesn’t blow up in your face.
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