You will check one of the highest-yielding SGX stocks or REITs against the course's yield trap checklist.
Wei Ling kept coming back to one REIT near the top of every high-yield list. She had read lessons 3.1 to 3.3 and knew a high yield could mean trouble. She also knew it could mean a sound REIT in an unpopular sector. What she did not have was a way to decide, so this time she wrote one down and ran the REIT through it, step by step.
That is this exercise. It takes about twenty-five minutes, and you finish with a verdict and the evidence behind it.
Use a stock screener or the SGX website's tools to sort SGX stocks and REITs by trailing yield. Pick one from near the top. If you hold one that yields well above the rest of your portfolio, use that instead. You will learn more from a case where you have money at stake.
Record the name, today's price and the trailing yield shown, with the source and date.
Work through five checks. For each one, write what you found and where you found it.
The first check is price trend. Look at the price over the last one and three years. Has the yield risen mainly because the price fell? If so, find out what the market was reacting to.
The second is recurring yield. Using the method from lesson 3.3, One-offs, specials and payouts that will not repeat, strip out specials and capital distributions and recalculate.
The third is payout cover. For a company, calculate the payout ratio on earnings and on free cash flow, as in lesson 2.2, Payout ratio tells you how much room is left. For a REIT, check whether distributions are being paid from operating income or topped up from capital, retained amounts or new borrowing. Module 5 adds more REIT-specific tests.
The fourth is debt. Look at the debt note. How much is due in the next two years, at what rates, and is the company or REIT close to any limits? Lesson 3.2, Warning signs that a dividend is about to be cut, covered what to look for.
The fifth is management's statements. Compare the dividend or distribution language in the last two results announcements. Has a firm policy turned into a review?
Here is a made-up REIT to show how the checklist reads when it is filled in.
The REIT trades at S$0.50 and has paid S$0.06 per unit over the last year, so screeners show a trailing yield of 12%. The price was S$0.80 three years ago and has fallen steadily since.
Recurring yield: the distribution statement shows S$0.01 of the S$0.06 was a capital distribution from a property sale. Recurring distributions were S$0.05, a recurring yield of 10%.
Payout cover: distributable income from operations fell in each of the last two years, and the manager has been releasing retained amounts to keep distributions from falling as fast.
Debt: a large share of borrowings fall due within eighteen months. Most of it was taken out when rates were lower, and the manager says it expects refinancing costs to rise.
Management statements: two years ago the results said the REIT aimed for stable distributions. The latest results say the manager is reviewing options to strengthen the balance sheet.
Now write what would have to be true for the S$0.06 to continue. The REIT would need operating income to recover, refinancing at rates close to the old ones, and no need for new equity or asset sales. Each of those is possible. None is supported by the evidence so far.
Verdict: fail. The headline 12% includes a one-off, operating income is falling, refinancing will raise costs, and management has started talking about the balance sheet in place of the distribution. A cut or an equity raising, or both, looks more likely than not on this evidence.
A pass means the high yield is explained by something other than a coming cut, such as a sector out of favour or a whole-market fall, and the payout is covered with room to spare.
A fail means the evidence points to a cut, as in the worked example.
More evidence needed means you could not settle it. That is a legitimate verdict, but only if you name the evidence. Write down exactly what would move it to a pass or a fail: next quarter's operating income, the refinancing rate, a statement on the distribution policy. Then put a date in your calendar to check.
None of these verdicts is a decision to buy or sell. The checklist tells you whether the yield is likely to last. What you do with that depends on your plan, which module 8 builds.
Run your own high yielder through the five checks now, and keep the notes, because lesson 8.3 asks you to rerun this same check whenever a holding cuts its payout.
Complete the yield trap checklist for one high-yielding SGX stock or REIT and write a pass, fail or more evidence verdict with reasons.
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