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Invest in income fund and REITS
06 Oct 2021 (662 views)  

Someone asked - do you think buying income fund with about 4% dividend is good investment or invest in REIT?

My reply

It depends on the assets that are invested by the income fund. If they are high risk bonds, also described as junk bonds, it would be risky. The junk bonds are issued by corporates that are highly leveraged and are at risk of default.

By investing in a fund, the investor gets diversification in many bonds. If one bond fails, the other bonds may still be safe. 

However, there is the risk of contagion. If a large bond fails, there is the fear that other bonds may also fail. This led to a sharp drop in prices for all the junk bonds. 

However, if the income fund is invested in blue chip stocks with a high dividend yield and with low price earning ratios, it would be quite safe.

I now talk about investing in REITS, i.e. real estate investment trusts. Each REIT is invested in several properties, usually in office buildings and shopping malls. 

The yield on the REIT comprise of the rental income, less the operating expenses and management fees, of the underlying assets. 

Currently, most REITS give a yield of about 4% or slightly lower. The risk is that the rental yields are still quite high, as the leases were signed in prior years. On renewal of the leases, the rental income may drop. 

Even the existing leases may get affected when the tenants gave up the leases due to inability to continue their business.

During the pandemic, many businesses are struggling to survive. This will cause the net rental income to fall in the near future. 

There is another factor that should be considered. Some of the REITs have asset values that are lower than the current unit prices. The investors are paying a higher price for the REITs than the asset value of the underlying assets. 

This is another risk that may cause a fall in the unit price of the REIT.

In summary, I prefer to avoid investing in an income fund that comprise of bonds or in REITs.

I prefer to invest in good quality stocks that have a price earning ratio below 10 times and a dividend yield of more than 3%.

Tan Kin Lian 

 


Invest in income fund and REITS
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Someone asked - do you think buying income fund with about 4% dividend is good investment or invest in REIT?

My reply

It depends on the assets that are invested by the income fund. If they are high risk bonds, also described as junk bonds, it would be risky. The junk bonds are issued by corporates that are highly leveraged and are at risk of default.

By investing in a fund, the investor gets diversification in many bonds. If one bond fails, the other bonds may still be safe. 

However, there is the risk of contagion. If a large bond fails, there is the fear that other bonds may also fail. This led to a sharp drop in prices for all the junk bonds. 

However, if the income fund is invested in blue chip stocks with a high dividend yield and with low price earning ratios, it would be quite safe.

I now talk about investing in REITS, i.e. real estate investment trusts. Each REIT is invested in several properties, usually in office buildings and shopping malls. 

The yield on the REIT comprise of the rental income, less the operating expenses and management fees, of the underlying assets. 

Currently, most REITS give a yield of about 4% or slightly lower. The risk is that the rental yields are still quite high, as the leases were signed in prior years. On renewal of the leases, the rental income may drop. 

Even the existing leases may get affected when the tenants gave up the leases due to inability to continue their business.

During the pandemic, many businesses are struggling to survive. This will cause the net rental income to fall in the near future. 

There is another factor that should be considered. Some of the REITs have asset values that are lower than the current unit prices. The investors are paying a higher price for the REITs than the asset value of the underlying assets. 

This is another risk that may cause a fall in the unit price of the REIT.

In summary, I prefer to avoid investing in an income fund that comprise of bonds or in REITs.

I prefer to invest in good quality stocks that have a price earning ratio below 10 times and a dividend yield of more than 3%.

Tan Kin Lian