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Who wouldn’t want a tidy sum of money coming in every month without putting in extra effort? No, we’re not talking about your salary, but about passive income of course.
Passive income is when you earn money without having to work too much for it. Unlike a side hustle where you actively do extra work outside of your regular job to earn a bit more money, earning passive income is really… passive.
In Singapore, some common ways to earn passive income can be through renting out property, receiving money via an annuity plan (such as CPF LIFE for individuals aged 65 and above), and of course investing in dividend generating Exchange Traded Funds (ETFs), stocks, bonds, and REITs.
Speaking of investing, let’s look at how you can work towards getting $1,000 passive income a month — by investing in REITs.
What are REITs?
You may have heard people talking about investing in property. More often than not, it’s about buying condos and renting them out or “flipping” houses expertly like roti prata. This often involves a large sum of money, which most of us don’t have at our disposal, especially for younger investors who are keen to set up their investment portfolio.
However, there is another accessible way for us to invest in property and that is through Real Estate Investment Trusts, or REITs. These REITs are companies that finance or own income-producing real estate across a range of property sectors.
Many of the assets owned by these REITs are familiar names such as shopping malls Bugis Junction (CapitaLand Integrated Commercial Trust), [email protected] (Lendlease Global Commercial REIT), and Suntec City (Suntec REIT). Other familiar names are business industrial REITs — Mapletree Commercial Trust, which holds VivoCity and Mapletree Business City and Ascendas REIT, which manages the Science Park and Changi Business Park.
REITs are a type of investment vehicle, very much like ETFs, stocks, bonds or mutual funds. When you invest in a REIT, you’re investing in the properties managed by that REIT. In a way, you somewhat own a part of the shopping malls, business parks, data centres, or whatever properties the REIT manages. So when these properties earn rental income, some of that money is paid to you in the form of dividends.
REITs generally yield around between 5% and 8% a year in dividends, which are paid out either quarterly or every 6 months. Now we’re here for the dividends to get a tidy sum of money from these REITs — which can contribute to our passive income. Also, your dividends are not taxable! This is unlike rental income from physical properties like a condo unit, which is subject to income tax.
You may be wondering if this is sufficient or even stable enough because REITs are still SGX-listed shares and the share price of a REIT can rise or fall as the market fluctuates.
However, REITs must pay out at least 90% of their taxable income each year. So even though their share prices may fall in a bad economy, they still have to pay out a substantial amount, which makes REITs a popular investment vehicle for many to get passive income.
The importance of diversification
As with all investments, it’s important to diversify, even when it comes to REITs. As different REITs manage different types of properties in various sectors, it’s difficult to pinpoint which REIT sector is going to outperform at any given time. Having exposure across sectors from retail to industrial, to data centres and business parks, could help you ride out the investment even if one sector isn’t doing too well.
For example, retail REITs were the top performers at the beginning of 2021, but these came under pressure due to the new Phase 2 heightened alert measures. Once we get back to Phase 3, we should be seeing more people going back to the malls and this sector should see a rebound.
If you’re not familiar with the various companies’ portfolios and assets, or want to take the guesswork out of picking individual REITs, consider roboadvisor Syfe for more exposure. Its REIT+ portfolio tracks the SGX iEdge S-REIT Leaders Index, and comprises Singapore’s 20 largest REITs such as Ascendas REIT and CapitaLand Integrated Commercial Trust.
How much do I need to invest?
The key question is: How much do you actually need to invest in order to get your desired passive income?
Let’s say you want a dividend income of $1,000 each month. Let’s assume an investor buys a single REIT with an average dividend yield of 5% p.a. over 25 years.
- $1,000 a month = $12,000 a year
- If $12,000 = 5%, total portfolio = $240,000
We’re realists, and we know that not everyone has a lump sum of $240k to invest. Hence the easiest and most common way to achieve this amount is through dollar cost averaging (DCA), where you invest a fixed amount every month over a long period of time.
Here’s how to invest consistently to achieve the “magic number” of $1,000 in dividend income each month, assuming that dividends are consistently reinvested into the portfolio:
|Dividend yield||5% p.a.|
|Time||Total Deposits||Total Dividends Received||Balance|
*Calculations assume no capital appreciation and a constant 5% dividend yield each year.
At the end of 25 years, you’d have hit your dividend income goal as the monthly interest earned would be $1,209.19 or higher if you continue to invest $400/month. Do note that due to the power of compounded interest, this is almost twice as much as the total deposits you actually put in ($135k).
Another way is to go with an investment platform with a focus on REITs, such as Syfe’s REIT+ portfolio. The portfolio provides good diversification as it holds 20 REITs across various sectors ranging from industrial, retail, commercial, healthcare and hospitality.
Here’s how the investor’s portfolio would look like, if he decides to invest via Syfe REIT+ instead of buying a single REIT:
*Projections are based on Syfe’s 100% REIT portfolio. The forecasts are calculated based on forward looking Monte Carlo simulations and takes into account projections for future dividend yields and capital appreciation As such, the dividend yield used in the forecast is not a constant X% p.a., which is unlikely to happen over any period of time. Explore your own Syfe REIT+ projections here.
But I can’t afford to invest so much!
If $15,000 lump sum and $400 a month is too difficult for your current state of finances, let’s begin with $5,000 lump sum and $200 a month to see where we can arrive at after 25 years at an average dividend yield of 5% p.a.:
|Time||Total Deposits||Total Interest||Balance|
*Calculations assume no capital appreciation and a constant 5% dividend yield each year.
You’d still achieve a healthy dividend income of $568.48 per month.
Again, let’s look at what happens if the person invests via Syfe REIT+ instead of buying a single REIT:
*Projections are based on Syfe’s 100% REIT portfolio. The forecasts are calculated based on forward looking Monte Carlo simulations and takes into account projections for future dividend yields and capital appreciation. As such, the dividend yield used in the forecast is not a constant X% p.a., which is unlikely to happen over any period of time. Explore your own Syfe REIT+ projections here.
To achieve higher passive income…
A dividend of $1,000/month is a pretty good start for consistent passive income but what if you want to increase it?
Naturally, as your salary increases or your financial situation improves, you’ll likely have more money to set aside for investing. With this, you can always put in a lump sum of money into your portfolio or increase the amount of your monthly deposits.
In short, you’ll reach your goal of $1,000/month dividend income faster. Hurrah!
You can also continue to invest for longer and get the power of compounded interest or power of investing early and holding to achieve a higher passive income.
How do I get started?
Getting started on investing in REITs is pretty straightforward. Earlier we mentioned roboadvisor Syfe, whose REIT+ portfolio holds Singapore’s top 20 largest REITs. That’s pretty robust.
Here’s a quick overview of Syfe REIT+:
|Syfe REIT+ portfolio||Top 5 REIT holdings: Ascendas Real Estate Investment Trust (AREIT), Mapletree Industrial Trust (MINT), CapitaLand Integrated Commercial Trust (CICT), Mapletree Logistics Trust (MLT) and Mapletree Commercial Trust (MCT)
View the full REIT holdings here
|Suggested option for your portfolio||100% REIT — Tracks the iEdge S-REIT Leaders Index with all its constituents, weights and corporate actions|
|Returns and dividend yield||5-year annualised return: 10.8%
2020 dividend yield: 4.5%
2019 dividend yield: 5.1%
|Annual management fee||0.40% – 0.65%|
|Lock-in period||None — withdraw your money anytime|
While dividend yield dipped in 2020 due to the pandemic, it’s likely yields will recover and surpass pre-pandemic levels over the medium term. For the quarter ending March 2021, the average reported distribution per unit (DPU) growth was 37.4% sequentially across the REIT sector, a sharp recovery from -17.5% year-on-year in 2020.
Additionally, note that your dividends will automatically be reinvested back into your REIT+ portfolio by default. Based on Syfe’s calculations, reinvested dividends can generate an extra 0.5% in returns for you over time. For clients who have invested at least $20,000 or more, they can opt to have their dividends credited to their bank account quarterly. Whichever option you pick, you have the full flexibility to withdraw any amount from your portfolio anytime.
If you don’t have $20k on hand to deposit, no pressure! You can always build up to that amount gradually. There is no minimum investment to get started and you can invest your preferred amount on a monthly basis since there are no brokerage charges. If you were to buy individual REITs through your broker each month, you would be paying between $10 to $25 in brokerage fees per transaction.
You can quickly sign up for a Syfe account online through the MoneySmart portal. Account creation can be done immediately with Singpass and you can deposit funds immediately once that’s confirmed.
Are you ready to start building your $1,000/month dividend income investment portfolio today?