Retirement satisfaction is positively correlated with income, net worth, health, and stable income streams.
Reports state that investors, who record the lowest levels of worry, don’t have the highest income prior to retirement. However, their net worth is the highest multiple of their pre-retirement income.
The findings suggest investors whose expectations are modest based upon their income level relative to their asset base are the most satisfied. Pre-retirement worry and post-retirement satisfaction are improved if annuitized income streams exist. The levels and types of these incomes and assets are important.
I’m not going to recommend that retirees should load up on REITs. However, REIT income should be part of the retirement process. Investors should look closer at the asset class to ensure the dividend income quality is reliable and repeatable.
But, just because you invest in a REIT, it’s not guaranteed the dividend income will be sustainable. Most retirees count on the income to fund expenses or enjoy their quality of living, so a dividend cut could be devastating.
Through diversification, investors can reduce risk without sacrificing returns, allowing investors to model portfolios with tactical allocations. Investors should maintain tactical diversification across multiple property sectors because each property has its own macro-economic characteristics.
Listed are five, inexpensive REITs that provide a higher risk option. Following the principles of value investing, if stocks are cheap, you buy them. But, I’m not recommending the “cheap” REITs; these are what I call “the crème de la crème.” If you want to get rich, you have to take the emotion out of the decision-making process and buy attractive dividend-paying stocks on sale.
5 highly predictable REITs
In a recent article on Seeking Alpha about Digital Realty (NYSE:DLR), I explained, “This cloud-based REIT is raining dividends, and I consider the interest rate fears to be nothing more than an opportunity.” Digital recently announced plans to increase its quarterly dividend on common stock by 8.6% – its 13th consecutive increase since the IPO in 2004.
I added, “For a value investor, today is the perfect storm (pun intended) to pick up new shares. The selloff in the REIT sector has created a wider margin of safety, and that’s precisely why I have initiated new purchases for my children’s college fund.”
Digital is no screaming bargain, but the stock is attractive. Shares are trading at 16.8x P/FFO (18x in 2017) with a dividend yield of 3.9%. The potential growth is strong, as consensus estimates predict growth of 7% in 2018 and 8% in 2019. My recommendation: BUY.
The stock in Realty Income (NYSE:O), one of the most predictable REITs on the planet, is getting a decent bid. The latest earnings results debunked most all of the short sellers. I explained in another recent article on Seeking Alpha, “Since 2013, Realty Income has achieved 102% recapture on re-leasing. If the company’s bank portfolio was the primary motivation for the short thesis, it is now debunked.”
Realty Income’s nominal first year weighted average cost of capital reflects the current AFFO yield and the cost of 10-year unsecured fixed-rate debt. This low cost of capital allows the company to acquire the highest quality in properties that provide favorable long-term returns and create meaningful near-term earnings growth. Realty Income estimates 2018 acquisitions will be $1 billion to $1.5 billion, translating to predictable profits.
Realty Income is trading at $51.25 per share with a P/AFFO multiple of 16.6x, compared to 19.1x over three years. The dividend yield is 5.1% while the consensus growth for AFFO in 2018 is 4%. My recommendation: BUY.
Federal Realty (NYSE:FRT) owns, operates, and redevelops high-quality retail-based properties in major coastal markets, like Washington, D.C., Boston, Mass., San Francisco, and Los Angeles, Calif.
Founded in 1962, FRT’s mission is to deliver long-term, sustainable growth through investing in densely-populated, affluent communities where retail demand exceeds supply. Its expertise includes creating urban, mixed-use neighborhoods, like Santana Row in San Jose, Calif.
FRT is one of the few REITs with an A-rated balance sheet. Its shares are trading at $117.32 per share with a P/FFO multiple of 19.7x. While a 3.4% dividend yield may seem modest, it has increased its dividend for over 50 years in a row. My recommendation: BUY
Tanger Factory Outlet (NYSE:SKT), who pioneered the outlet industry in 1981, is the only publicly-traded REIT specializing in the development, leasing, marketing, and operations of outlet centers in the U.S. and Canada.
Jim Cramer, host of CNBC’s Mad Money, recently urged investors to sell mall-based real estate investment. Cramer added that even the best-run shopping center REITS, like Federal Realty and Tanger, are broken stocks and potentially broken companies, “hurt by the long-term resurgence in interest rates.” However, I believe it’s better to be in the market invested in value stocks than to play the timing game.
Tanger shares are trading at $21.76 with a P/FFO multiple of 10.0x, compared to 15.6x over the last four years. The dividend yield is 6.3%. My recommendation: STRONG BUY.
W.P. Carey (NYSE:WPC) is a global net lease REIT that provides long-term, sale-leaseback, and build-to-suit financing solutions for companies worldwide. As of Q4-17, the company had an enterprise value of approximately $11.5 billion. It generates around 80% of AFFO from its owned real estate operations and 29% of AFFO from its investment management business.
At the end of Q3-17, WPC owned an 887-property portfolio across 19 countries with industrial, office, retail, and warehouse facilities. During 2017, WPC declared distributions totaling $4.01 per share, completing its 20th year of rising dividends while maintaining a 76% payout ratio.
In a recent article, I explained that WPC is a highly attractive alternative “given the year-to-date pullback in REITs. The company outperformed most of the other Net Lease REITs in 2017 (due to the limited retail exposure).”
WPC shares are trading at $61.98 with a P/FFO multiple of 11.7x, compared to 12.1x last year. The dividend yield is now 6.5%. Like the other four REITs, WPC has a long history of paying and increasing dividends. The attraction to this company is the consistency of the dividend. My recommendation: BUY
In conclusion
For most investors, diversification is the simplest and cheapest way to obtain some safety. While every investor has his or her own risk tolerance levels, owning REITs is an important method to build wealth. As Charles B. Carlson, CEO of Horizon Investment Service, explains, “If you want the recipe for getting rich in the stock market, here it is: find stocks with above-average appreciation potential and safe and growing dividends, and buy them at attractive prices.”
Bruce Greenwald of First Eagle Funds put it another way, “There are no bad days in the market. When the market is down, you’ve got bargains, and it’s lovely to think of what you are buying at low prices. When the market is up, the bargains have gone, but you’re rich.”
It’s your turn to get behind the wheel!
I own shares in DLR. WPC, O, and SKT.
