Donald Trump's Impact on SUNREIT Dividend Capture Strategy

Wow, tomorrow is the cut-off date for a REIT’s dividend entitlement and let’s invest into the REIT now to qualify for the dividend! Some may perceive this method as a way to earn risk-free money from the share market. But is this really risk-free?

The above scenario is very common among retail investors and this method is known as dividend capture strategy. Basically, an investor may buy into the REIT one day prior to the cut-off date in order to earn the dividend that has been declared.

Is This a Risk-Free Strategy?

To illustrate based on Sunway REIT’s data, the cut-off date of recently declared quarterly distribution per share of RM0.0227 was on 10 November 2016.  The payment date is on 29 November 2016.

SUNREIT announced the dividend on 27 October and its share price stood at RM1.77 per unit at closing and subsequently, it hit all-time high of RM1.84 in early November. Perhaps some investors might be chasing to invest into SUNREIT before cut-off date on 10 November, hence pushing up the share price of SUNREIT. 

If an investor buys SUNREIT at the high of RM1.84 per unit, RM0.0227 quarterly gross dividend will yield income return of 1.23%. But, if you compare the purchase price of RM1.84 against market price on 14 November of RM1.68, the investor would have an unrealised capital loss of 8.7%.

Is the Total Return still Positive?

Total Return= Income Return + Capital Gain / Loss

Although the income return is a positive 1.23%, the unrealised capital loss of 8.7% will cause the total return to be NEGATIVE!

Investors who are not well-prepared might face a rude shock when a REIT which is a “safe” instrument, delivered a negative total return in such a short span of time.

What Are the Possible Factors that Contribute to the Decline in SUNREIT’s Price?

~Recent plunge in Ringgit Malaysia.

~Recent plunge in Malaysia government bonds’ prices.

~Knee-jerk sentiment following the victory of Donald Trump.

Would Trump’s victory result in less visitor footfalls to Sunway Pyramid Mall? Sunway Carnival Mall? Sunway Medical Centre and many more assets parked under SUNREIT?

Does the decline in share price reflect just noises or fundamental issues?

I will be concerned if the decline in REIT’s prices is attributable to the deterioration in the earning power of the assets under a REIT. If the fundamentals remain solid, there is not much to worry about.

That said, buying at RM1.84 per share may not be a good entry level as it reflects valuation level which is way above past 5-year average valuation.

The key to earning a positive return from REIT is to buy good REIT at an attractive price level. Hopefully, total return will be a positive number in the long run!