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The recent decision by the Energy Regulatory Commission (ERC) to suspend the provisional authority of S.I. Power Corporation (SIPCOR) has sent shockwaves through the Philippine energy sector, and its effects are expected to reverberate directly to Premiere Island Power REIT (PREIT). The move, prompted by SIPCOR’s “multiple violations” and its failure to provide a reliable power supply to Siquijor province, poses a significant threat to PREIT’s financial and operational stability. 

A Shared Foundation, A Single Point of Failure
PREIT, a real estate investment trust, was specifically established to hold the real estate assets of its sponsors, which include SIPCOR. The core of PREIT’s initial portfolio consists of land and power plant assets that are leased to and used by its sponsors, including SIPCOR’s heavy fuel oil (HFO)-fired power plants in Siquijor. In essence, PREIT’s revenue stream is directly tied to the operations of its sponsors, with SIPCOR being a primary source of that income through its lease agreements. 

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In the world of real estate investment trusts (REITs), a high dividend yield can be an alluring prospect, promising significant income streams for investors. However, a yield that appears “too good to be true” often comes with an unspoken caveat: increased risk. The market, in its collective wisdom, tends to price in perceived risks through various mechanisms, and a higher yield in the REIT space can frequently be a reflection of such concerns.

The Inverse Relationship: Yield and Risk

At its core, the yield of a REIT is calculated by dividing its annual dividend per share by its current share price. When a REIT’s share price falls, its yield increases (assuming dividends remain constant). A prolonged or significant drop in share price often signals that the market views the underlying assets, management, or future prospects of the REIT with apprehension.

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For investors holding a portfolio primarily composed of Real Estate Investment Trusts (REITs), the appeal is clear: stable rental income, regular dividends, and exposure to the robust real estate sector. However, to truly optimize your portfolio for income and diversification, consider complementing your REITs with a selection of established, dividend-paying Philippine companies outside of the property sector.
Adding dividend champions like Meralco (MER), International Container Terminal Services, Inc. (ICT), San Miguel Food and Beverage, Inc. (FB), DMCI Holdings, Inc. (DMC), and PLDT Inc. (TEL) can offer several key benefits:

* Sectoral Diversification: While REITs offer diversification within real estate, these companies provide exposure to essential services (Meralco), global trade and logistics (ICTSI), consumer staples (SMFB), diversified infrastructure and mining (DMCI), and telecommunications (PLDT). This reduces your portfolio’s concentration risk in a single sector.
* Steady Income Streams: These companies have a long history of profitability and, importantly, a consistent track record of paying dividends, providing another layer of regular income to your portfolio. This can be particularly attractive during periods when real estate yields might fluctuate.
* Potential for Capital Appreciation: Beyond dividends, these established market leaders also offer potential for capital appreciation as their businesses grow and expand.
* Defensive Qualities: Companies involved in utilities (Meralco), consumer staples (SMFB), and telecommunications (PLDT) often exhibit defensive characteristics, meaning their demand is relatively inelastic even during economic downturns, providing a degree of stability to your portfolio.

Let’s delve into each of these potential complementary dividend stocks:

1) Meralco (MER): Powering Your Portfolio
As the largest electricity distributor in the Philippines, Meralco is a classic defensive stock. Its essential service ensures consistent demand, translating into stable revenues and a reliable dividend payout. Investing in MER provides exposure to the country’s growing energy needs and urban development. Its regulated nature often leads to predictable earnings, making it a cornerstone for income-focused investors.

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Investors interested in REITs outside the Philippines can invest in UITFs from Manulife Investment Management of which there are two: Manulife Asia Pacific REIT Fund of Funds and Manulife Global REIT Feeder Fund.

For the Manulife Asia Pacific REIT Fund of Funds, its average annualized dividend yield is 4.71%, with a management fee of 1.75%. For the Manulife Global REIT Feeder Fund, its average annualized dividend yield is 4.55% with the same 1.75% management fee. Note that the above yields are already net of fees.

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The workings of the market has always intrigued me and this is one of those. At its current price, buyers of VREIT will sit on more than 10% dividend yield. That means the market is discounting this REIT, by a lot. But why?

Let’s look at its rental assets: It has 256,000 sqm of GLA made up of 10 community malls and 2 office buildings. It has 97% occupancy rate and has managed to increase its dividends every year since its IPO in 2022. Although no further asset infusions have happened or plans announced, VREIT only has 20% of sponsor Vista Land’s commercial leasing portfolio of 1.6 million sqm so the potential is there.

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