How to Build a Reliable Income Stream with REITs In Singapore

Updated: 2 days ago

Real Estate Investment Trusts (REITs) are often seen as a reliable vehicle for generating passive income, especially for those seeking steady dividends for their retirement in Singapore.

However, not all REITs are created equal, and it’s important to know how to choose those that can provide consistent, long-term dividends while minimizing risks.

Below are three key principles that can help you earn consistent dividends safely with REITs.

1: Focus On Operational Yield

When evaluating a REIT's ability to generate dividends, it's crucial to focus on the operational yield rather than just the reported headline dividend yield.

Operational yield is a more accurate reflection of the REIT’s core performance since it represents income generated from the REIT's primary operations - rent collection from tenants.

Unfortunately, in Singapore, many REITs tend to report a higher distribution per unit (DPU) due to non-operational items like management fees paid in units rather than cash. This ends up inflating the reported dividend yield which can mislead investors into thinking that the REIT is generating higher returns than it is.

Ultimately, this may cause an investor to value the REITs wrongly which usually ends up in severe capital losses down the road when the management decides to unwind their decision to pay themselves in units and the market is forced to value the REIT based on their operational yield.

An example of this is Keppel REIT:

While the fundamentals of the REIT are rock solid, the current valuation that the market is placing on the REIT is questionable given that around 39% of the dividends are supported by non-operational items.

Investors looking for REITs offering a dividend yield of 5% or more may consider Keppel REIT undervalued, as it is currently trading at approximately a 6% yield based on the dividends reported previously.

Nevertheless, assessing Keppel REIT based solely on its operational income would present a contrasting perspective, as the projected dividend yield from operations stands at a mere 3.68%, falling significantly short of the 5% yield expectation and indicating an overvaluation.

Investors who invest based on the reported dividend yield may find themselves with lower distributions in the future which could also cause share prices to fall, resulting in severe capital and income losses when these non-operational items fade away.

Key takeaway:

Always dig deeper into a REIT’s financials to understand the real operational yield. Disregard temporary boosts from non-operational income and focus on the long-term sustainability of its cash flow.

2: Avoid Managers With Poor Track Record

Management plays a pivotal role in ensuring a REIT’s consistent performance.

A poor management team can erode value, resulting in declining dividends and share prices. When evaluating a REIT, assess the management team’s history of maintaining stable distributable income per unit and the REIT’s net asset value (NAV) per unit over time.

Managers who have a conflict of interest may prioritize acquiring non-yield accretive properties to increase their fees, often at the expense of the investors’ distributions. Be cautious of such behaviour as it can reduce the REIT's ability to maintain its distributions per unit.

Instead, look for management teams with a strong track record of making yield-accretive acquisitions and demonstrating prudent capital allocation. In fact, a track record of not having any acquisitions is also acceptable as so long as the management can maintain their distribution per unit over time.

An example of this is OUE REIT which grew the value of its portfolio at the expense of its shareholders who suffered a massive decline in dividends per unit and share price.

While the REIT managers had a stroke of bad luck in acquiring hospitality properties right before COVID-19, it doesn’t negate the bad track record between 2014 to 2019.

While OUE REIT may recover in the future, investors should not negate the poor track record thus far in their consideration of whether they should start a position which will be further elaborated in my last point.

Key takeaway:

A strong and ethical management is key to ensuring stable and sustainable dividends. Avoid REITs managed by teams with a history of poor financial management or those with potential conflicts of interest as those sorts of behaviour would result in a high risk of capital losses as the REIT gets run down to the ground.

3: Differentiate Between Strategic & Tactical REITs

Not all REITs are meant to be held for the same purpose. There are two main categories to consider: strategic REITs and tactical REITs.

Strategic REITs: These are typically long-term holdings and serve as an anchor for investors when it comes to income generation and capital preservation. These are REITs that have good and proven managers, resilient operations and stable distribution, a healthy balance sheet and a strong sponsor. Strategic REIT should encompass the majority of your REIT portfolio such that you can receive a stable dividend income without exposing your capital to a high risk of losses from mismanagement or fundamental deterioration. However, investors should not expect to receive high returns from such REITs as it is unlikely that the fundamentals, dividend stability and share price would experience much changes over the years. Examples of such REITs are Parkway Life REIT, CapitaLand Integrated Commercial Trust and Frasers Centrepoint Trust
Tactical REITs: These are typically short to medium-term holdings and are usually bought when market mispricing presents an opportunity for capital gains and high dividend yields. For instance, during market selloffs or sector-specific downturns, a REIT’s share price may fall significantly even if its operational performance remains solid. This presents an opportunity to buy at a discount and profit both from dividend income and potential capital appreciation. For a REIT to be considered as a tactical REIT it should have an acceptable management that need not be proven (since we’re not expecting to hold for the long term), a resilient operation with or without stable distribution and a passable balance sheet. Given that tactical risk carries significantly higher levels of risk, you should keep your overall allocation low (no more than 20-30%) such that the impact of the downside risk is manageable should your investment thesis turn out to be wrong. More importantly, the yield of the REIT should be attractive enough to justify the position. I’d consider a position in such REITs if the yield from operations is more than 8%, provided that the fundamentals are reasonable and there is a strong case of mispricing by the broad market. Examples of such REITs include United Hampshire REIT, Cromwell European Trust and Keppel Pacific Oak US REIT.

Key takeaway: Knowing the difference between strategic and tactical REITs can help you structure a diversified portfolio that maximizes both stability and income. Hold strategic REITs for steady dividends and use tactical REITs for dividend enhancements and capital appreciation opportunities.

Conclusion

Earning consistent dividends from REITs safely requires a deeper understanding of the REIT’s operations, management quality, and the nature of the REIT itself.

By focusing on operational yield, avoiding poorly managed REITs, and differentiating between strategic and tactical REITs, you can build a portfolio that generates reliable dividends while minimizing risks.

Taking these steps ensures that your REIT investments remain a stable source of passive income over the long term.

If you would like to read my analyst report on Singapore Listed REITs, you can find them on my telegram channel:

*Join the channel → click on the channel name → under files → download the report you want!

If you would like to learn about REIT investing, you can find my entire methodology in my eBook: Retire With REITs here:

If you are looking for personalized financial advice, I offer a 1-to-1, fee-only consultation where you will receive personalized strategies to design, implement and manage a profitable REIT portfolio. You can find out more about it here: