Does Dollar Cost Averaging Work All The Time?

Does Dollar Cost Averaging Work All The Time?

It has been a few months already that real estate investment trust (reit) prices have been retreating as income instrument yield rise with the expected interest rate hikes. To date, it has been widely expected that there should be about 4 to 5 hikes in 2022 and another 2-3 hikes in 2023, to bring the near-zero interest rate now to about 2.5% by mid-2023. The recent Federal Open Market Committee (FOMC) meeting unleashed a more dire picture. The likelihood of the 1st hike, which was originally expected to take place in mid-2022, is now widely expected to happen as early as March 2022. Furthermore, the first interest rate hike could be 50 basis points instead of originally expected 25 basis points. As of now, nothing has taken place yet, but the market sentiment is good enough to cause reit prices as well as many income instruments to fall about 15% from their peak. In fact, by now, many reit prices have broken their 52-weeks low.

This post was originally posted here. The writer, Brennan Pak, is a veteran community member and blogger on InvestingNote, with a username known as @BrennenPak and has 3625 followers.

Of course, we all know that reit prices have an inverse relation with the interest rates. Given that interest rates are widely expected to rise in the near future, we should be expecting reit prices to fall correspondingly. Given the falling trend, perhaps thwarted by its consistent quarterly or bi-annually dividend payouts but spiced relatively frequently with fund-raising exercises, is it better to buy now and take advantage of the dividend pay-outs or just simply wait out till we get clearer signals when the interest hike ends? Realistically, I do not know the exact answer because dividend per unit (DPU) distributions are ever-changing. Furthermore fund-raising exercises are also not predictable, although we do know that reit managers tend to carry out fund raising exercises just before interest rate hikes as it is the lowest possible cost for the reit expansion in the foreseeable future. So, as an investor, is it better to continue to plough back our money in the declining stock in hope to get increasing dividend or simply to let the price avalanche stabilize before ploughing more funds in the stock.

Let us take the generally popular reit, Mapletree Industrial Trust (MIT), as a case study. In the latest fund-raising exercise, the offer was 50 right shares for every 1000 shares owned and each right share was offered at $2.64. This means that a unit-holder of 1000 shares should pay $132 for the 50 rights share. Tabling the calculations, we should expect the unit price to decline to $2.55 at worst from the time of fund raising till now to square off.

Based on the unit price of $2.51 at the close just before the chinese new year, it means that, despite a number of dividend payouts quarterly, the descent in the unit price has wiped out all the dividend payouts since the time when the rights was raised. In fact, the price decline has already eaten into the dividends even before the rights issue. Hence, while it is great to continue receiving dividends (and certainly increasing dividends), one should be mindful that a sharp descent in the stock price can just simply wipe out many quarters of past dividends. In fact, based on the current unit price, it may not be too far-fetch to deduce that the reit units purchased in the last 2 years, which is more or less at the tail-end of the low interest rate cycle, were already in the red. Imagine if one were to carry out dollar cost averaging at close intervals during this two-year period, the situation is worse off due to the sharp decline in the unit price compare to the descent in the average unit cost.

Likewise, let’s look at Ascendas Reit, an equally popular industrial reit. It raised 37 rights for 1000 units held in end 2019.

Again the market price indicated that the recent descent had wiped out the aggregate dividends and even eat into the dividends pay-outs before the recent rights issue. In fact, it showed that sentiments can change very fast given that the rights issue was heavily over-subscribed at that time. If we had carried out dollar cost averaging at the very close intervals during this period, the situation could be worse because the price descent is again sharper than decline in the average cost.

The two case studies indicate that purchasing income assets at the tail-end of the interest rate cycle is likely to end up miserably. Doing the dollar cost averaging in this period could be disastrous in such a circumstance unless we are extremely sure that a turn around is around the corner.

Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.

Once again, this article is a guest post and was originally posted on BrennenPak‘s profile on InvestingNote. 

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