REIT ETFs Offer Attractive Yields
The Dynamic Wealth Report
April 18, 2008
A Time For Yield?
The S&P 500 has been flat for almost 9 years. If you read Wednesday’s
article you no doubt studied the chart we presented. The Index has been
essentially flat for the better part of a decade.
Clearly, just investing in the S&P 500 index would have provided abysmal
returns. It’s returns like these that cause a fundamental shift in
investor sentiment. A shift I believe we can all profit from.
The impact of horrible returns.
Life is full of unintended consequences. We see it every day. Laws
passed by good-intentioned government officials end up hurting the very
people they were expected to protect. Just look at the Alternative
Minimum Tax or AMT. This tax law was passed to prevent the richest of
the rich from avoiding taxes. Now millions of middle-income Americans
are caught in its grip. (You’d think congress could fix this problem in
10 minutes.)
The market’s not immune from unintended consequences.
With index investments providing such poor returns, investors are
frustrated. They’re starting to jettison index funds in exchange for better
investments. These investors are seeking a true return. A cash on cash
return.
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With a realization that the market doesn’t always trend up, investment
portfolios are shifting. Investors need to do something. And that
something is to invest for yield. Investment yield is the cash returned
to an investor from a particular investment.
Bonds are the most common and widely held provider of yield. For
example, 10 year Treasury Notes backed by the US Government are
currently yielding 3.8%. So, for every $100 invested you get $3.80 every
year. At the end of the 10 years you also get all of your principal
back.
But there’s a problem.
The yield a bond pays doesn’t take into account the impact of inflation.
That’s right. When you buy a bond you are in essence making a loan. The
yield on that loan never changes. You get the same amount . . . year in
and year out.
This is where inflation rears its nasty head. I don’t know if you
noticed but prices are going up. I remember when gas cost less than 99
cents. Now I’m paying $3.25 a gallon to fill my tank. Everyone’s seeing
the same thing in food costs. Just scan the news for riots. Riots over
the rising cost of food. My grandfather (who lived through the
depression) pointed out to me that apples used to cost $1 per pound not
too long ago . . . now he pays $1.30. That’s a 30% increase, and that’s
inflation.
Inflation is everywhere. It destroys the purchasing power of your hard
earned dollar. And those fixed yields bonds are paying also suffer from
the impact of inflation.
There is a way to avoid this problem.
Bonds might be the most popular investment with yield. But there are a
number of other options. Stocks that pay dividends, REITs, Master
Limited Partnerships, and a host of options strategies just to name a
few.
Why would these be better than bonds?
Two reasons. First, bond yields are tied to interest rates. When
inflation becomes a significant problem in the economy, the best way to
deal with it is by raising interest rates. Climbing interest rates make
bond investments fall in value. So when the Federal Reserve starts
raising interest rates to battle inflation, the value of your bonds are
going to plummet.
Longer term, other securities have the ability to increase payouts. Let
me give you an example. Simon Property Group (SPG) a REIT which owns malls
all over the US paid a healthy dividend of just over $2.00 per share in
2000. In just the last 12 months the company has paid its shareholders
over $3.42. That’s roughly a 71% increase in the dividend. Increases
like that help battle back the impact of inflation.
I happen to like the REIT industry right now for its yield. And investors
who’ve been burned by the market will start to hunt for yield.
The REIT industry consistently pays nice dividends. Investors benefit from
their REITs' tax advantaged status. You can also slice and dice
your REIT investments. What do I mean by that? REITs can be broken down
by building type (apartments, commercial, hospitals, storage units,
etc.) or by geography. You can also divide them up by size, leverage, or
by financial performance.
Unfortunately it’s a little too complicated to get into here, but
believe me, REITS can be structured in hundreds of ways. What I do is
cheat. I don’t try to slice and dice my investment in the industry.
Instead, I buy a big basket of REITS and average out my returns.
This diversification gives me great exposure to the industry while
limiting my risk. The basket of REITs I have in my portfolio is the iShares Dow Jones US Real Estate (IYR). This REIT ETF is a great way to
collect a nice yield while protecting yourself from the impact of
inflation.
• Google (GOOG) received upgrades from Collins
Stewart and Jefferies both to a “Buy” rating. Nice of them to make a
move AFTER the stock rallied almost $100.
• JP Morgan and UBS downgraded Nokia (NOK) this week. The mobile phone supplier has been hit hard after announcing handset
volumes would be below expectations. The weak dollar was blamed.
• Robert W. Baird initiated coverage on Clean Harbors
(CLHB) with a Neutral rating. The company is focused on environmental
services and the treatment of hazardous waste.
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