Big-dividend REITs have underperformed the rest of the market, particularly since the election, as interest rate expectations have increased, and investors have sold “safe-haven” stocks in favor of more aggressive-growth sectors. In our view, this has created some attractive investment opportunities. This article provides data on 60 Industrial and Retail REITS yielding over 4%, and also highlights a few of our favorites.
This first table provides data on retail REITs, many of which have significantly underperformed the S&P 500 recently and thereby creating some attractive contrarian opportunities.
For example, we wrote about Realty Income and EPR Properties (both retail REITs) months ago, concluding they both offered safe dividends, but that their valuations we getting ahead of themselves.
However, since that time their prices have come down (as shown in the following chart) thereby providing more attractive entry points for long-term investors to consider.
Specifically, our October article (Realty Income: Big Dividend, 3 Big Risks ) concluded that...
“Realty Income has an impressive track record of big safe growing monthly dividend payments, and a stock price that has exhibited lower than average volatility. We believe it has the financial wherewithal to keep paying and increasing the dividend. However, we also believe it is less likely for Realty Income’s… stock price to appreciate as attractively in the future as they have in the past.”
However, given Realty Income’s very significant price decline over the last six months, we consider it to now be a more attractive investment opportunity.
Similarly, we wrote about EPR Properties last August (EPR Properties: Big Monthly Dividend, Priced for Growth), but concluded that…
“EPR Properties’ big dividend is safe. Additionally, its total returns have exhibited very low volatility. Further, it has significant growth prospects ahead. That said, it can still be difficult to hit the buy button on a security that has just rallied like EPR has… We don't condone market-timing, but at the very least, if you are an income-seeking investor, add this one to your watch list, and consider buying on the next pullback.”
EPR’s pullback has arrived (as shown in our earlier chart), and we believe now is a more compelling time for income-focused investors to consider investing in EPR Properties.
For added perspective on both Realty Income and EPR Properties, the following two charts show their share prices are now particularly more attractive relative to funds from operations (FFO) per share.
However, despite the seemingly attractive contrarian opportunities in retail REITs such as EPR Properties and Realty Income, you may still be thinking retail real estate is a dying breed that is slowly being replaced by online stores. While in some cases this may be true, it’s not always. Regardless, we have also provided data on industrial REITs for your consideration.
The returns within this group have been more varied over the last one-year time period with some of them outperforming the S&P 500 and some of them underperforming. For example, one higher-risk, big-monthly-dividend-paying (6.0%) industrial REIT that we have highlighted in the past is Stag Industrial.
We like Stag’s strategy of investing in less sought after secondary and tertiary industrial properties, and then reducing the idiosyncratic risks via diversification. And even though Stag has delivered a 48.5% total return over the last year, we believe the strategy has continued upside potential (especially given the White House's aggressive-growth and "Made in the USA" agenda). The one big word of caution, however, is that if the market pulls back then Stag will likely pull back sharply considering its less desirable property locations (i.e. secondary and tertiary property locations). In the meantime, Stag offers big (6.0%) monthly dividend payments.
And if you fear that retail REITs are a dying breed (e.g. shopping malls will be replaced by online stores) and Industrial REITs are ahead of themselves (for example, Stag and many others have rallied recently) then you may want to consider healthcare REITs. Healthcare in general has underperformed in recent months in light of uncertainty around the future of the Affordable Care Act. However, we believe fear in the sector may be overblown, and there are many attractive opportunities within the healthcare REIT space.
For example, we like Welltower (HCN), HCP Inc (HCP), and Omega Healthcare Investors (OHI), as we have written about here....
Lastly, in this week’s members-only Blue Harbinger Weekly, we review the three REITs we currently own in our Blue Harbinger Income Equity portfolio…