Author Topic: Selecting REITs  (Read 2459 times)

washlawyer

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Selecting REITs
« on: January 25, 2016, 09:02:33 AM »
I have some rules of thumb I follow when picking dividend stocks -- one is that the payout ratio should be less than 60%.

I want to increase investments in REITs.  I've noticed that the payout ratios for most REITs are high -- I'm hard pressed to find payout ratios less than 60%, and often they are upwards of 200%.

Is there a reason why payout ratios might be of less concern for REITs?  What rules of thumb do you follow for picking REITs?

zz_marcello

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Re: Selecting REITs
« Reply #1 on: January 25, 2016, 09:11:24 AM »
US REITS by law have to distribute min 90% of income to shareholders; otherwise tax treatment would change.

I would look for REITS that have a long history with stable and strong growing dividends over a long time and that ideally did not cut their dividends even during the 2008 housing/credit crisis.
Top picks for me are "HCP" and especially "O".
"O" has the strongest multi decade dividend growth; its debt has investment quality (and because of that is not affected by current credit spread windening)

When credit spreads will reach levels of the 1992 or 2001 recession for me personally it makes sense to buy also US REITS with lower quality debt.
Candidates for that ar "OLP" and "SNH" with current yields of 7-11%. Those health care REITS are always temporary weaker in front of recessions (with rising credit spreads) because they are less able to increase rents due to their long term contracts. But when credit spreads max out they come back and investors will enjoy a combination of high dividends + high capital gains.

Yes, you could call that market timing. I call it credit cycle timing and for me that is working well.
https://research.stlouisfed.org/fred2/series/BAMLH0A3HYC

When credit spreads are even higher in a few month I would also mix a bit high yield bonds into the equation. The HYLD ETF is already paying ~11% yield.
Of course it is down a lot because bond spreads of B quality and especially CCC bonds quality where exploding in the last few months.
But in the middle of the recession they will come back like they always do and then they are a great investment for some years.
« Last Edit: January 25, 2016, 09:30:50 AM by zz_marcello »

washlawyer

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Re: Selecting REITs
« Reply #2 on: January 25, 2016, 09:51:57 AM »
Thanks zz_marcello!  Very helpful.

Thought I'd try to pick your REIT knowledge a bit more, since your level of knowledge is way above mine!  The advice is almost universally to keep REITs in tax-advantaged accounts.  If that's not possible (my 401K is the federal government TSP, which doesn't offer REITs), does keeping REITs in a tax disadvantaged account wipe out the benefits of REITs?  I saw that Merriman recommends ditching REITs altogether in that case in his Buy and Hold Portfolio and allocating to stocks instead. 

zz_marcello

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Re: Selecting REITs
« Reply #3 on: January 25, 2016, 10:15:07 AM »
Hi!

I would never rule them out completely because even as a pure buy and hold they are a good tool to reduce portfolio volatility and will let you sleep better.
REITS normally show weakness already before the public or the stock market smells a recession and they normally already bounce back when the stock market is still depressed or even still going down. (look at the 1991-1993 or the 1998-2003 period; REITS where falling when stocks where still rising and vice a versa).

That said when you have a very high tax bracket I would have maybe a lower allocation ratio to REITS (because dividends are taxed like ordinary income) and ramp them up when you are closer to lowering your income outside investment world.

But even with ordinary income taxation a top REIT like "O" was still better than the total stock market since 1994:
http://www.realtyincome.com/about/track-record/
I personally would buy the Vanguard REIT ETF and on top 2-3 top individual REITS like O and HCP to increase performance.

I'm an Investor + Stock/Futures Trader + still Manager in the Automotive Industry. I could FIRE with a 4% withdrawal rate but I'm currently accumulating more because stock market valuations are high and my plan is to be covered with after tax dividends + a nice safety margin.


...when your user name reflects reality we are living very close ( I'm in McLean VA)
« Last Edit: January 25, 2016, 10:29:13 AM by zz_marcello »

washlawyer

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Re: Selecting REITs
« Reply #4 on: January 25, 2016, 10:34:25 AM »
That said when you have a very high tax bracket I would have maybe a lower allocation ratio to REITS (because dividends are taxed like ordinary income) and ramp them up when you are closer to lowering your income outside investment world.

But even with ordinary income taxation a top REIT like "O" was still better than the total stock market since 1994:
http://www.realtyincome.com/about/track-record/
I personally would buy the Vanguard REIT ETF and on top 2-3 top individual REITS like O and HCP to increase performance.

I'm at the 28% tax bracket for now and for the foreseeable future so that's a helpful warning -- unfortunately my background is not in math so figuring out the upshot of all this is making my head spin.  Thanks for all this information, including the suggested investments -- I will look into them further!

And congratulations on being able to FIRE!  Great position to be in, even if you're choosing to keep working.  And yes, we are close by -- I'm a lawyer for the fed gov't in DC.  I'm 30 years old, and just beginning to dive into all this stuff (and clearly using a snow day to research further). 

zz_marcello

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Re: Selecting REITs
« Reply #5 on: January 25, 2016, 10:41:40 AM »
Ok!
With 30 years and your background you are in a fantastic position. I already crossed 40; so you can do much better then me!
You don't need any math background; just keep saving/investing and learn some more financial basics. Things will all work out for you.
When you buy (Vanguard) US stock index funds, mix with some international stock funds, some REITS and later a bit of bonds you are 90% there.
The rest is icing on the cake. Most important is that you don't spend all your income in this beautiful city where you are living.
:-)

washlawyer

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Re: Selecting REITs
« Reply #6 on: January 25, 2016, 11:30:15 AM »
Ok!
With 30 years and your background you are in a fantastic position. I already crossed 40; so you can do much better then me!
You don't need any math background; just keep saving/investing and learn some more financial basics. Things will all work out for you.
When you buy (Vanguard) US stock index funds, mix with some international stock funds, some REITS and later a bit of bonds you are 90% there.
The rest is icing on the cake. Most important is that you don't spend all your income in this beautiful city where you are living.
:-)

Thanks!  And I'm trying not to -- spend my income that is.  I think that's the hardest part!  ;)

GGNoob

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Re: Selecting REITs
« Reply #7 on: January 25, 2016, 12:17:00 PM »
If you like Realty Income Corp (O), National Retail Properties (NNN) is a good one to check out as well.