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On September 1st, equity or property owning real estate investment trusts (REITs) were set up as a separate Standard and Poor’s stock market sector. That should have been good news, but it has really not worked out that way yet.
The REIT sector gained 16% in 2016 through the end of July. Since then, the group –as tracked by the Vanguard REIT Index Fund (NYSE: VNQ), has given most of those gains back and is now up just 2% for the year. This means that REITs have declined by 12% over the last three months and a lot of income stock investors are running scared. If you own or want to own REITs, stop running away and take advantage of the opportunity.
To a great extent, this fall looks a lot like 2015. The stock sectors, which are viewed as interest rate sensitive, have been declining in value on the expectation of a rate hike from the Federal Reserve. Last year, the Fed raised rates in December and the market corrected in earnest at the beginning of 2016.
This year, with REITs on average down 12% since the August peak, the market is anticipating the effects of an interest rate hike. As is often the case with market corrections, it seems that REIT values have overshot to the downside. Let’s take a look at what is really happened and will happen with interest rates.
Last year, the Fed increased its Fed Funds discount rate from basically zero percent up to 0.25%. The Fed Funds rate drives short-term interest rates, and 0.25% was still very close to the zero that had been in effect since the end of 2008. It is likely that the Fed will again raise its discount rate by 0.25% after its December meeting.
At that point, short-term rates will still be at a very low one-half of one percent. This level of rates will not affect the business results of quality REITs and will not drive investors to sell their much higher yielding REIT shares to buy one-year certificates of deposit with sub one percent rates.
On the long end of the yield curve, the rate story gets a bit more interesting. A year ago, the 10-year Treasury was priced to yield about 2.3%. Over the first half of 2016, the long-term yield dropped to below 1.4%. Then, over the past few months the 10-year yield has climbed back above 1.8%. This yield run-up is relatively large, but in the bigger picture, the rate is still not far above the record lows set earlier this year. Again, a long-term interest rate at about 2% is not going to meaningfully affect REIT business results.
However, the fall in REIT values has also pushed up REIT yields. I recently updated my REIT stocks database and over the past couple of months, yields on these stocks have climbed by an average of 0.5%. This means if you buy shares of quality REITs now, you lock in that higher yield for as long as you own the shares.
As my newsletter subscribers know, I am a fan of buying or adding to income stock positions when prices are down. A 12% decline in the REIT sector looks like a regular and unavoidable market correction. With the recent price declines, some of the most popular REITs carry very attractive yields.
Here are a few that deserve a closer look:
Omega Healthcare Investors Inc. (NYSE:OHI) is a healthcare sector REIT that may be best known for increasing its dividend rate every quarter. In mid-October, the company announced its 17th straight dividend payment increase. Two months ago, OHI was yielding 6.3%. Now after the share price decline and an announcement of a higher dividend, the stock yields 7.7%. If you believe the dividend stock adage that the safest dividend is one that has just been increased, Omega Healthcare Investors now looks like a very good value.
Realty Income Corp (NYSE:O) may be the most popular REIT of all with individual investors. This triple net lease model company has paid 555 consecutive monthly dividends and increased that dividend for 76 straight quarters. No wonder it’s popular! At the recent share price peak, Realty Income was priced to yield just 3.3%. Now the stock is priced to yield 4.14%. Money invested in O will now earn 25% more cash every month compared to the peak value.
In my November Dividend Hunter newsletter, I discuss EPR Properties (NYSE:EPR) with subscribers. At the recent peak, EPR was yielding 4.5% and looking a bit over-valued. Now the yield is back up to 5.4%. EPR has been a great long-term total return investment, and investors should be ready to buy when the share price dips.
Stocks like Realty Income, Omega Healthcare, and EPR Properties that won’t cut their dividends, pay a high current yield, and have the potential for dividend growth is an integral part of the income strategy for my newsletter, The Dividend Hunter. All three stocks in this article are strong, stable dividend payers just like the 20 high-yield stocks currently available through my Monthly Dividend Paycheck Calendar system for generating a high monthly income stream from the market’s most stable high-yield stocks.