Take one-off payments out of a yield figure so you can see the income that recurs.
The yield to use when you plan income counts only the payouts that repeat year after year. To find it, take every payout from the last twelve months, remove anything that came from a one-off event, and divide what is left by today's price. The result is your recurring yield: the last twelve months of payouts, minus one-offs, divided by today's price.
Ravi, Wei Ling's cousin, wanted a REIT he held to cover his insurance premiums. A website showed the REIT's yield as 7%, and he used that 7% to work out how many units he needed. A year later, his distributions came in well short of his plan.
Nothing had gone wrong at the REIT. The 7% had included a one-off payment, and Ravi had planned as if it would be paid again. Say the units cost S$1.00 each and the REIT paid S$0.07 per unit over the past year (example figures). The website's calculation was S$0.07 / S$1.00 = 7%. Of that S$0.07, S$0.01 was a capital distribution from a property sale. The recurring payout was S$0.07 - S$0.01 = S$0.06, and S$0.06 / S$1.00 = 6%.
So Ravi's recurring yield was 6%, one percentage point below the advertised figure. Because he had a fixed bill to pay, that gap left him about a seventh short of the income he expected.
The same arithmetic applies to stocks. In Lesson 2.1, "Dividend yield looks backward", Wei Ling's stock showed a yield of 9.2% with its special dividend and 5.2% without it.
Most screeners and broker apps calculate trailing yield by adding everything paid in the last twelve months, including specials and capital distributions, and dividing by today's price. Their data feeds do not separate the parts of a payout, so the sites rarely separate them either.
A stock or REIT that paid a large one-off in the last year will show an inflated yield for twelve months, until that payment drops out of the window. During that year, the website figure overstates what the holding normally pays.
A special dividend is a one-off company payout. Lesson 1.2, "Where dividends come from and how often they are paid", introduced them. A company usually pays one when it sells a building, a business unit or an investment, books a gain, and passes part of that gain to shareholders. A company may also pay a special after an unusually strong year.
Specials are real money and worth having. However, the event that paid for them is over. A building sold this year cannot be sold again next year. Treat every special as a one-off and leave it out of your planning figures. The exception is a company with a stated policy of paying specials regularly from a recurring source.
Company dividends are fairly easy to sort. Every dividend announcement on SGXNet states the type of payout, and specials are labelled as specials. The interim and final dividends are the recurring part.
S-REIT distributions are harder to read than company dividends, because one distribution can contain several parts. The announcement, or the distribution statement in the results, usually breaks a distribution into those parts. Labels differ between REITs, but the parts usually fall into three groups:
Income from rent and operations. This is the recurring part. Tax-exempt income, often from overseas holdings. Capital distributions.
A capital distribution is a REIT payout of money that did not come from the current period's operating income. It often comes from selling a property at a gain and passing some of that gain to unitholders. Some REITs pay out the whole gain at once. Others spread it over several periods to keep distributions steady while they look for a new asset or wait for income to recover.
Retained income works in a similar way. A REIT may hold back part of its distributable income in a good period and release it in a later one. Holding back and releasing income smooths the distribution chart, so one period's distribution may include money earned in an earlier period.
None of this is hidden or improper, and REITs disclose it. What you need to know is how much of each distribution came from the properties' rent in that period, because that is the part that repeats. Look in the distribution statement or in the notes to the results presentation, and watch for wording such as "capital distribution", "distribution of divestment gains" and "release of retained amounts".
Start by finding the announcements for every payout the holding made in the last twelve months. For each payout, note the type. For a REIT, also note how the distribution breaks down into its parts.
Add up only the recurring parts. For a company, these are the interim and final dividends. For a REIT, this is the operating part of the distribution. Divide that total by today's price, and the result is the recurring yield.
Then compare your figure with the website's. Yours should be the same or lower. If yours comes out higher, check that you used the same twelve-month window as the site and a current price. Read the gap between the two figures as the part of the advertised yield that came from one-offs.
The recurring yield shows what the holding is likely to pay next year if nothing changes. It is not a promise, because recurring payouts can still be cut, as Module 3 showed. It is the right starting point for planning, though. A plan built on a figure that includes one-offs is short of money from day one, as Ravi found. Lesson 8.3, "Rules for reinvesting and for dividend cuts", turns this into a spending rule: when you draw income from a portfolio, spend the recurring part and leave one-offs invested.
For the activity, choose one stock or REIT that paid a special or a capital distribution in the last year and run these steps on it. The gap you find is the amount a website-based plan like Ravi's would have overstated.
Pick one stock or REIT that paid a special or capital distribution last year. Work out its yield again using only the recurring payouts.
Junxiong-WFG Organisation is an authorised representative of AIA Financial Advisers Private Limited (Reg. No. 201715016G).