Real estate investment trusts (REITs), like bonds, are high on the list of income investments the experts think will get hit as the Federal Reserve continues to hike interest rates. But these “experts” may have it all wrong. REITs actually look like great income investments, for several reasons.
When a broad swath of insiders challenge negative Wall Street sentiment, it’s time to side with those who have front-row seats to the business. That’s what we’re seeing in the REIT space, where insiders at more than 15 companies recently have poured tens of millions of dollars into their own stocks.
What do these insiders know that the “experts” don’t? Big picture: “It’s just not true that REITs underperform the S&P 500 during rate increases,” says Robert Stevenson, the head of real estate equity research at Janney Montgomery Scott. Why not? Because REITs aren’t bonds.
- Unlike bonds, REITs regularly increase payouts. That makes them more like Treasury Inflation-Protected Securities (TIPS) than straight bonds. REITs currently pay a 4% dividend yield on average, and they’re raising payouts 6% a year. “It’s been since I was a kid that anyone talked about 6% inflation,” Stevenson says.
- REITs have another form of inflation protection that bonds lack. Leases roll over about every five years. Even when they don’t, they allow for rent hikes linked to tenants’ business strength, says Raj Dhanda, president of Black Creek Group, a real estate investment company. Both of these give plenty of openings to raise rents. Bond payouts are static.
- REITs are reasonably priced. Some look pricey, but overall they trade in line with the Standard & Poor’s 500-stock index, compared to a 15% premium over the past five years, says REIT analyst Vin Chao at Deutsche Bank.
- The fundamentals look sound. Jobs and wage growth are the main drivers for real estate, and they’re both OK. Then there’s the gift from Washington, D.C. – the main form of REIT income just got more favorable treatment in the new tax law.
So if you’re shopping for income investments, follow the insiders. Here’s a guide to nine REITs with some of the best insider buying.
SEE ALSO: 50 Dividend Stocks You Can Count On in 2018
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Date — January 25, 2018 1:41 pm
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