Share values of real estate investment trust (REIT) companies have been dropping since the Fed announced its last Fed Funds Target Rate increase on December 13. The Fed started raising interest rates in quarter percent increments in December 2015. Each of the four rate increase announcements has been accompanied by a pull back in REIT values. These declines have been short-lived and can be viewed as buying opportunities.
2017 was an interesting year for the REIT sector. While most of the S&P market sectors had stellar returns for the year, REITs as a group returned just a positive 5.1%. In contrast, the S&P 500 gained 21.8%. With average REIT yields near 4%, the 5% total return gives the impression that REIT values did not do much in 2017. This chart of the SPDR Dow Jones REIT ETF (NYSE: RWR) shows that while the values at the start and end of the year were close to the same, there was a lot of share value action during the year.
In total, there were nine significant swings of REIT values over the run of 2017. This chart shows that to make money with REITs when the Fed is increasing rates, investors would be best served by accumulating shares during the dips. The price swings show that results for individual investors last year could range from a significantly negative total return up to close to double-digit positive total returns. Buying at lower share prices also results in an increased dividend yield, which would further boost an investor’s total returns. The REIT sector last peaked in mid-December just after the last Fed rate increase. Since then REIT values are down by 6.5%. This is the time to pick up some high-quality REITs and watch the share values for signs that prices have bottomed for this cycle. It’s not possible to pick and exact bottom, but the good news is that some very high-quality REITs are now sporting very attractive yields.
In an environment where the Fed is raising rates, the REITs to own are the ones that can and will grow their dividends at a faster rate than the interest rate increases. Here are three to consider:
Ventas, Inc. (NYSE: VTR) is one of the largest REITs operating in the healthcare sector. This REIT sector has been hard hit on the fears associated with having the Federal government as a major source of healthcare services payments.
VTR is down 23% from its 52-week high, and the shares yield 5.75%. This is a full percent above the four-year average yield for Ventas. This company should grow its dividend by 4% to 5% per year.
I’ve been in and out of VTR in my Dividend Hunter service several times for both the dividend payments as well as the share price swings bagging some nice gains each time.
MGM Growth Properties LLC (NYSE: MGP) owns casino properties that are master leased to MGM Resorts International (NYSE: MGM). MGP has increased its dividend three times since it was spun-off by MGM in spring 2016.
MGP currently accounts for 24% of total rooms and 35% of private (non-municipal) convention space on the Las Vegas Strip.
I forecast continued 6% to 8% annual dividend growth.
The MGP share price is now 10% below the 2017 high on speculation that parent company MGM may incur huge liabilities from the tragic Mandalay Bay incident last year. The shares yield 5.9%.
EPR Properties (NYSE: EPR) is now trading at 22% below its peak value. EPR functions as a triple-net lease (NNN) REIT. With this model, the tenants that lease the properties owned by EPR are responsible for all the operating costs like taxes, utilities and maintenance. EPR’s job is to collect the rent checks.
This REIT owns multiplex movie theaters, golf and ski entertainment facilities and private/charter school properties. EPR has been in growth mode over the past year: it now holds more properties in six of the 10 categories it owns, one is completely new, two have the same number of properties, and only one so saw the number shrink by two properties.
EPR is a steady 7% per year dividend growth and pays monthly dividends. The shares currently yield 6.8%.
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