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Ian Cowie: bargains for the brave or funds for fools? Our columnist examines an area offering high yields. However, over the past year and five years this has, in some cases, come at the cost of lower total returns.
6th June 2024
by Ian Cowie from interactive investor
Critics of investment trusts claim that double-digit discounts to net asset values (NAVs) are illusory if nothing happens to lift share prices back into line with NAVs. Now, a £434 million commercial property investment trust, where I reported buying shares here last month, has seen its price jump by 11% in one day on bid speculation.
Some illusions seem to be more powerful than others. The warehouse specialist, Tritax EuroBox Euro Ord
EBOX is the sterling currency version) surged to just short of its annual high when Brookfield Asset Management Ltd Ordinary Shares – Class A BAM confirmed it is considering a bid.
The Canadian fund manager, which claims to have US $725 billion (£569 billion) under management, said it is in the early stages of assessing a possible cash offer for the entire share capital of EBOX. However, that £434 million stock market capitalisation remains -26% below this investment trust’s NAV – which is in line with the average for its sector. So, I believe there might be further to go for both EBOX and other undervalued commercial property investment trusts.
Either way, shareholders are being paid to be patient with dividend income of 7.2%. Not that we should have to wait too long before news, one way or another, because BAM is now required by takeover rules to either announce a firm intention to make an offer for EBOX or admit that it does not intend to make an offer before close of business on 1 July.
Here and now, bid activity adds urgency to considering income and growth opportunities in the heavily discounted commercial property sectors of Britain and Continental Europe. Whatever cynics may say about the lack of catalysts for recovery, you can still buy £1 worth of many warehouses, office blocks or shopping malls for less than 75p or less.
For example, even greater dividend yields and discounts – of 9.1% and -39% respectively – can be obtained from Schroder European Real Estate Inv Trust SERE This £199 million investment trust owns a variety of commercial properties in Paris, Berlin, Hamburg and Frankfurt.
Sad to say, the price of a higher income has been lower total returns because SERE has shrunk shareholders’ capital by -12% and -20% over the last five-year and one-year periods respectively. For comparison, EBOX’s total returns over the same periods are -12% and plus 13% respectively. Neither of these Continental European property trusts has a decade-long record.
Decent dividends with higher total returns and deeply discounted prices can be found closer to home in UK Commercial Property. For example, abrdn Property Income Trust Ord API
currently yields 7.6% income but remains priced -31% below its NAV, despite leading its sector over the last year with a total return of 9.2%.
API’s five and 10-year track record offers a partial explanation by illustrating the cyclical volatility of this sector. Over the shorter period, its total return is -23% while, over the longer term, it is positive by the same amount.
Balanced Commercial Property Ord BCPT
ranks second over the last year after similar switchbacks over the long, medium and short terms. Is a current dividend yield of 6.6% sufficient to justify total returns over the last decade, five years and one-year periods of plus 6.4%, minus 14% and plus 6.6%? BCPT’s -26% share price discount to NAV suggests that for many folk the answer is “no”.
Part of the problem with API and BCPT is that neither has consistently delivered rising dividends. Both have shrunk shareholders’ income over the last five years; by annual averages of -3.4% and -3.3% respectively.
Top 10 most-popular investment trusts: May 2024 The top 10 most-popular investment funds: May 2024 Investors piling into US funds, but are they joining the party too late? More positively, real estate income trust Alternative Income REIT Ord AIRE
currently yields 8.8% income, despite raising dividends by an annual average of more than 13% over the last five years. It is important to beware that dividends are not guaranteed, because they can be cut or cancelled without notice, but if that rate of ascent is sustained it would double shareholders’ income in less than five years and six months.
AIRE’s 18 underlying properties are spread across diverse sectors including “automotive and petroleum, education, healthcare, hotels and industrials”. Its total return over the last year is a modest 5.5%, but it also remained positive over the last five years with a total return of 22% although it lacks a 10-year record. Its discount is -16.5%.
All the above investment trusts have survived setbacks for this sector – ranging from rising interest rates and online shopping to Covid collapsing demand for offices and technology boosting working from home. Commercial property investment trusts have demonstrated that closed-end funds are a much better way to gain exposure to illiquid assets than their open-ended rivals, which former Bank of England governor Mark Carney memorably described as being “built on a lie”.
Looking forward, it remains to be seen whether the dividend yields and discounts currently available in this sector will prove to be bargains for the brave…or funds for fools.
Ian Cowie is a freelance contributor and not a direct employee of interactive investor.
Darvas Boxes. Still a time for sitting although if u are in profit u could take some money of the table to be sure to be sure. The worst that could happen is that the share continues to rise and u make more money.
Yield 10.8% and trades at a discount to NAV of 37%. The dividend is at the high end of a risk profile.
I’d buy cheap REITs with £500 to target a £500k nest egg Investing regularly in carefully-chosen cheap UK REITs could help investors build significant wealth.
Zaven Boyrazian, MSc
When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.
Real estate investment trusts (REITs) can be a powerful addition to a retirement portfolio. These types of businesses are notorious for offering impressive dividends that can build into a chunky passive income with minimal effort. And when left to reinvest over the long term, a carefully constructed portfolio of top-notch stocks could even transform into a £500,000 nest egg.
The power of investing regularly Dividend investing often doesn’t get associated with high levels of growth. After all, it’s typically only large mature businesses that redistribute excess earnings back to shareholders. Yet despite this, dividends have historically provided the lion’s share of investment returns. In fact, since 1960, an estimated 85% of gains have come from shareholder pay outs.
There are a few reasons behind this phenomenon. However, the leading catalyst is the miracle of compounding. By regularly investing a lump sum each month, as well as automatically reinvesting any dividends received, the number of shares owned in each business increases. For each additional share, more dividends are received when the next payment date comes around. And this process repeats then repeats itself over and over again in a wealth-building loop.
Turning £500 into £500k Ensuring that a portfolio has a constant, steady stream of capital is essential. The more an investor can spare each month, the better. However, it’s critical to try and mitigate, or better, eliminate any risk of falling short. Why? Because in the long run, missing out on even just one month of investing can leave a lot of money on the table.
To demonstrate, £500 compounded at 9% for 25 years is worth around £4,700. In other words, for each missed month, investors lose almost five grand of wealth. But for those who consistently invest at this rate of return without missing a beat, they can expect to have just over £560,000.
Of course, achieving a 9% return each year is easier said than done. The FTSE 100 has historically only offered around 8%, and over the last decade, it’s actually been closer to 6%. This is where REITs come to the rescue. With their chunky yields and steady share price appreciation, reaching a 9% target becomes a bit more straightforward.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
However, like with every investment, nothing is risk-free. REITs may have a strong reputation for paying dividends, but they’re also known for operating with a lot of debt and with interest rates now elevated, leveraged balance sheets are under pressure. .
In fact, that’s precisely why yields in 2024 is sitting higher since lower confidence from investors has dragged down valuations.
We think earning passive income has never been easier Do you like the idea of dividend income?
The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?
Increases in food, energy and motoring costs will see those approaching retirement having to save more to afford the lifestyle they want.
Savers typically aim for a pension pot of £250,000 on average but end up with just over half of that in reality, new research reveals.
This is a massive shortfall in the amount they hoped to have available (£250,000) to buy an annuity or invest to generate an income.
A £250,000 pot can buy an annuity – which provides a guaranteed income for life – worth £12,091 a year at today’s rates, according to Standard Life.
A £131,000 fund can currently get someone an annuity of £6,332 a year.
With many people ending up with just over half of their pension saving goal, Britons are urged to carefully consider their retirement plans so they can ensure they have enough to live off in retirement.
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Warren Buffett, the Oracle of Omaha, is a name synonymous with success, wisdom, and wealth in the world of investment.
Buffett has shared his advice with fellow investors. But there’s one lesson that should stand above the rest for the young cohort. That’s the power of time.
That because, while it’s true that Buffett made a significant portion of his wealth after the age of 50, this was largely due to the miraculous effects of compounding.
The power of time
The hallmark of Buffett’s success is undoubtedly the magical concept of compounding. This phenomenon, which he refers to as the “eighth wonder of the world,” is responsible for the substantial growth of his wealth.
Compounding accelerates the growth of investments over time, and the sooner one starts, the more powerful the effect.
It essentially works because, by reinvesting our returns year after year, we start to earn interest on our interest as well as our starting capital.
For anyone in their twenties, it’s a huge opportunity, even starting with a small sum.
Compounding takes time to work its magic, making the early years of investment crucial for long-term wealth accumulation.
Long-term outlook
Buffett’s long-term outlook syncs perfectly with the principles of compound returns, allowing him to reinvest returns in his carefully selected long-term investments year after year.
Moreover, his commitment to long-termism enables him to ride out market volatility, avoid emotional decisions, and focus on the enduring value of his investments.
Bringing it all together
What does investing for the long run and leveraging time look like for young investors. Well, let’s imagine I’m starting a portfolio at the age of 20, and I have no starting capital.
And because I have no starting capital, I’m going to commit to contributing £200 a month, and I’m going to increase that contribution by 5% annually — broadly in line current inflation.
The thing is, at 20 I’ve got a long investment horizon, and theoretically, I could be working for the next 50 years.
So, taking into account the aforementioned, and using a 8% annualised return as an example, here’s what I’d potentially have at the end of it — £3.2m.
Of course, if I invest poorly, I could lose money. Compound returns also works negatively too.
But while I’ve used 8% as an example, it’s worth noting than more experienced investors will aim for low double-digit annualised returns.
If we swapped 8% in our calculation for 12%, the end figure after 50 years would be £12.6m. That’s a phenomenal number.
££££££££
If u look at any compound interest table, it doesn’t matter what your timescale is, the last years are when u really start to benefit from compounding. So the sooner u start the better of u should be. Stick to your plan thru thick and then and there will be plenty of thin.
