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Stock Commentary

Why does a REIT’s yield keep changing?

Merkado Barkada
Why does a REITâs yield keep changing?

I get asked this one a lot, and I think it just comes down to a common misunderstanding about exactly what an investor gets when they buy a share of a REIT. To cover the basics, “yield” measures the return of a REIT’s dividends as a percentage of its stock price. In very simplified terms, if the stock (imaginary company: XREIT) is worth P100, and the dividends for the year added up to P5 pesos, that’s a 5% yield (5/100). But when we measure the dividend and how we measure it can have dramatically different results for the yield. Say for example we want to measure the yield relative to the REIT’s IPO price.

Say XREIT currently trades at P100 but its IPO offer price was P80/share. Relative to the IPO offer price, the P5 in total dividends gives a yield of 6.25% (5/80). That works alright when we’re looking backward at a full year’s dividends (like all of the dividends declared in 2020), or if we’re considering XREIT’s “trailing 12 months” (TTM) dividends (where we just count all the dividends declared in the 12 months that came before today).

But what if we want to get an idea of what will happen in the future? That’s where the concept of annualized dividends becomes very useful. To estimate a stock’s yield into the future, we take the stock's most recent dividend (say, XREIT’s imaginary Q2 dividend of P2/share), and we multiply that by the number of periods in the year. Since there are four quarters in a year, we just multiply the P2 dividend by 4 and get an annualized dividend of P8, and that gives us an annualized yield of 8.00% based on the current stock price (P100) and the annualized dividend calculation we just did.

In cases where the most recent dividend is already known and hasn’t changed for a while, XREIT’s projected yield is going to change daily depending on XREIT’s current stock price, because we’re calculating projected yield as “annualized dividends / current stock price”. The annualized dividend part of the equation changes roughly every quarter, but the current stock price part changes daily. That’s why the yield keeps shifting!


MB BOTTOM-LINE

The return that an investor gets from a REIT is not guaranteed, and I think that’s where some people can get a bit confused. The projected yield that I have listed for the REITs is really just an approximation. For the companies that have already gone through their IPO, the approximation annualizes their actual performance and declared dividends, and gives investors an idea of what that share could return based on its current performance and stock price. For companies that haven’t done an IPO yet, the projection is based on the projected financial statements and projected dividends that the companies have provided. None of those projections are guaranteed.

The companies still have to work hard to execute their plans and respond to the real-world challenges that pop up from time to time. You know, like COVID. Or like the mass exodus of POGO clients to neighboring SE Asian countries. The projected yield isn’t like a rate of interest that will accrue to the investor regardless of what happens around the stock: it’s a moving approximation of what kind of return an investor could get based on the stock price today, and the best and most recent information that we have on the company’s potential performance.

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Merkado Barkada is a free daily newsletter on the PSE, investing, and business in the Philippines. You can subscribe to the newsletter or follow on Twitter to receive the full daily updates.

Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.

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