Why You Should NOT DCA into REITs

Dollar cost averaging (DCA) is a popular strategy used by investors to spread their investments over time, regardless of market conditions. It’s often recommended for volatile assets like stocks, where prices fluctuate significantly, making it hard to predict the right time to buy.

The idea behind DCA is simple: by investing a fixed amount regularly, you can reduce the risk of making a large investment when prices are high. However, when it comes to Real Estate Investment Trusts (REITs), DCA may not be the best market entry strategy. Here's why:

REITs Are More Like Fixed Income Instruments

REITs are unique compared to stocks because they operate more like perpetual fixed-income instruments.

While stocks represent ownership in a company with uncertain cash flow and unpredictable dividend payout ratios, REITs listed in Singapore are incentivised and often pay out more than 90% of their earnings to investors.

Furthermore, the dividends from REITs come from predictable and relatively stable sources like rental income, making the future cash flows of REITs easier to evaluate.

In this way, REITs are similar to fixed-income investments like bonds. Both offer regular, predictable income, and both can be evaluated based on their yield relative to prevailing market conditions.

This predictability also makes it easier to determine the "fair value" of a REIT investment presenting very clear entry and exit points based on the prevailing dividend yield of the REITs which brings me to my next point on timing.

Timing & Dividend Yield Matters

Just like it wouldn’t make sense to lock your money into a fixed deposit or invest in a Singapore Government Savings Bond when interest rates are low, it doesn’t make sense to buy into a REIT when the yields are unattractive.

The dividend yield of a REIT is a critical factor because it represents the income you will receive as an investor. When yields are low, it may be a sign that the REIT is overvalued relative to its income-generating ability.

Dollar-cost averaging assumes that you can't predict the market, so spreading out your investments would help you minimize the risk of a bad entry price. But when it comes to REITs, assuming that the fundamentals are sound, the yield tells you a lot about whether it’s the right time to buy.

If a REIT’s yield is significantly lower than its historical average or lower than what other REITs are offering, it may be overpriced. Buying into an overpriced REIT through DCA locks you into lower returns for the foreseeable future, much like locking into a low-yield fixed deposit.

Furthermore, by DCA-ing during a time when the REIT is overvalued and the dividend yield is low, you are inevitably lowering the average dividend yield of your REIT portfolio while exposing the portfolio to a higher risk of capital loss when the share price corrects itself back to a level that aligns with the the historical average dividend yield.

Opportunity Cost Of DCA-ing in REITs

Another reason why Dollar Cost Averaging may not be ideal for REITs is the opportunity cost.

Given the limitation of the asset class, investors of REITs should always operate based on the assumption that their REITs will offer low (similar to inflation rate) or no growth in the distribution of their REIT investments.

If you are dollar cost averaging into a REIT with a low yield, you're essentially tying up your capital in an investment with limited upside potential. In the meantime, other REITs or investment opportunities with better yields and growth prospects may emerge.

By waiting for more favourable conditions—such as a market correction or a dip in REIT prices that pushes yields higher—you can put your capital to work more efficiently.

Conclusion

Long story short, focus on valuation and buy when the yield is attractive instead of ignoring the yields.

While dollar cost averaging is a proven strategy for dealing with the volatility and uncertainty of stock investing, it’s less effective for REITs.

The more predictable nature of REIT income allows investors to value them more accurately and time their purchases based on yield.

Just like with fixed deposits or bonds, it doesn’t make sense to invest in a REIT when the yield is low. Instead, wait for opportunities when yields are higher, signalling that the REIT is undervalued and offers better potential returns.

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

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

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