Books and Thoughts - Growing Your Tree Of Prosperity

The "Me and My Money" article of the sunday times investment section this week features Mr Ng Wai Chung, the author of the books Growing Your Tree Of Prosperity (2005), Harvesting The Fruits Of Prosperity (2007), and the latest book Sowing The Seeds Of Prosperity. I have read the first 2 books, and actually my interest in REIT investment is partly inspired by his books. I believe he is in turn inspired by Robert Kiyosaki's idea of cash flow in Rich Dad Poor Dad. The main idea he is trying to put forward is that we should grow our passive income and reduce our expenses to a point that the passive income can more than cover the expenses. I like the books because they are written in the Singapore context, so while Rich Dad Poor Dad tells you the concept of cash flow, these books provide some useful guidance in how to put the cashflow concept into practice in Singapore.

REIT was introduced in the books as a viable investment vehicle to grow the passive income because it pays a dividend that is usually higher than normal companies, and it does so in a regularly and consistently, in terms of the distribution amount. The books also introduced some companies that pay relatively high dividend consistently, such as the telcos, Comfort Delgro, SPH, etc.

I remember reading about REITs in one of the chapters, probably in the 2005 book. I think at that time not many REITs have been listed yet, so it has only introduced Ascendas REIT (A-REIT) and CapitaMall Trust (CMT). The yield then, as mentioned in the book, was about 4%, and it was considered a relatively high yield at that time. As of this writing, CMT yield is about 5.4%, and A-REIT about 7%. Few months back in March, their stock prices were so depressed that they were yielding more than 10%. I think someone who has seen these REITs yielding at 4% in 2005, would never have believed the yield will go up to 10% one day. This just get to show how much things can change in the market.

In 2008, around the time after the collapse of Bear Stearns and before the collapse of Lehman Brothers, in order to grow my passive income, I was shopping around for high yield stocks. I thought it was a good time to go into the market as some time after the collapse of Bear Stearns, the market seems to have stabilized. So I bought high yield stocks like Cambridge Industrial Trust (CIT), a REIT, First Ship Lease Trust (FSLT), a Shipping Trust, and Macquarie International Infrastructure Fund (MIIF), a Business Trust. I bought CIT at around 0.680++, FSLT at around 1.100++, and MIIF at around 0.860++. At that time I thought it was too good an opportunity to miss, as they were trading at around 50-70% of their peak prices in 2007, at 50-70% of their NAV, and were all yielding more than 10%. I did check their historical cash flow to verify that they had been consistent in generating the cash flow to support the dividend distribution. The gearing was rather high for all the 3 trusts, but I did not think too much into it. My thinking then was even if the market goes down, I will still be able to get a regular distribution of cash to help ride through the rough times.

Well to this day I still believe my thinking was not entirely wrong then. Dividend yield stocks should indeed help you ride through rough times with the regular cash flow. However, I have underestimated the effect of the credit crunch on companies with high level of debts. During the good times where there was abundance of credit, these companies have borrowed heavily to acquire more assets to boost the yield.With the collapse of Lehman, financial institutions were unwilling to lend, and so the worry over the repayment or refinancing of debts became such a big issue that their stock prices were heavily punished by the market. Their prices went down to an all time low, dropping by a further 50-70% of my purchase prices. Dividends were also cut, some by as much as 50%. I sold them at a huge loss at the worst of the crisis to switch to blue chips. Prices of blue chips also went down a lot at that time, but I was more confident of the recovery of blue chips than the high yield and high gearing stocks. In hind side, I have done the right thing as with the recent bull run most of the blue chips have recovered to pre-Lehman levels, whereas CIT and MIIF are still trading around 0.4++ and FSLT around 0.6++, still way below their pre-Lehman levels.

So what have I learnt? Don't chase high yield stocks just for the sake of getting as much dividend as possible. Research into whether they can sustain the dividend payout. More importantly, check the kind of debts they are holding and the chances of repaying or refinancing. If you are not sure,
it may be wiser to go for something that may yield less but is able to give you a better peace of mind (like Singapore Post, Comfort Delgro, etc). If you are not careful, you may lose so much in the capital that will take years of dividends to cover back. The building up of passive income should be a long term affair, so sustainabilty of the payout is very important. You do not want to come to a point that suddenly the distribution is cut such that your passive income is no longer able to cover the expenses.