VNQ cheap right now?

[jleo]

I am wondering everyones thoughts on VNQ, my area is to expensive to make any money in real estate so I am looking into VNQ looks like the rise of interest rates has been built into the price for the most part and with a yield of 4.79% seems attractive to me, am I not seeing something here?

[Rob_bob]

If you believe real estate should be a part of your asset allocation then VNQ would be good to own and REITs have been beaten down.  And if you don't believe in market timing then the time to add it to your portfolio would be now.

[Classical_Liberal]

The thing I don't like about a cap weighted REIT ETF is the large portion of retail REIT's in the mix.  Those guys are dying a slow death, IMO.

Fundamentally, individual REIT's are already diversified in that they have many properties, with many lessees.  A well managed REIT is more like Berkshire Hathaway. If an investor is ever willing to buy individual stocks, buying some non-retail REIT's right now seems like a decent idea mid-long term.   Short term, increasing rates might keep biting them in the ass until we see the next recession and people start flocking towards good dividend payers.

[midwesterner1982]

If you're willing to wait, it seems likely the price of VNQ could get cheaper.  I've found 19% of VNQ's holdings are in the Retail sector which I think will hold it back some.  I've noticed VNQ seems to be selling off shares of SPG (at a loss) which is it's largest holding.  Not sure of the reasoning behind that.  Maybe trying to reduce the Retail holdings?

A mortgage REIT I'm watching is NLY.  Again, I expect it to go lower short term as rate hikes continue but as you mentioned a certain amount may already be priced in.  It's already down 16% since Christmas.  I'm considering a long term buy and hold at a price below $9.75.  The current annual dividend yield is over 11% so not a bad one to hold and DRIP over the long term but there is still a lot of risk for short term price.  Furthermore, if they reduced the dividend there could be a mass exodus.

[SeattleCPA]

I think you can make an even better argument to include a REIT index in your portfolio. I think it'll dial down the risks of your portfolio and possibly with very little impact on your returns.

I posted following blog article to illustrate why a 100% stocks allocation really doesn't make sense... but coincidentally used VNQ.

100% Stocks Allocation Suffers from Two Big Weaknesses

The post's math in a few words...

As compared to a 100% stocks allocation, a 50% stocks and 50% REITs allocation delivers higher return with same risk if you look at longer interval available when I wrote blog post.

As compared to 100% stocks allocation, a portfolio that peels off 30% into treasuries and then evenly splits the remainder between stocks and REITs delivers same return as 100% stocks but with way, way less risk if you look at same interval.

BTW, not saying the asset allocations mentioned above and talked about in blog post are what someone should use. But I am saying you can either dial up returns or dial down portfolio risks by building a portfolio using asset classes that aren't highly correlated.

[chasesfish]

I'm a HUGE fan of REITs...but they are difficult to "back test".   The Great Recession was fueled by exotic real estate backed debt, so REITs actually suffered worse than stocks for an asset class that's supposed to be more stable.  I hate to put it like this, but you almost have to toss history out the window.

I'm not a fan of indexing REITs, as someone mentioned, it's like Bershire Hathaway, you're already paying a management team to own 100s of properties, pick the REIT.  Some REIT indexes also include mortgage REITs, which are often just high risk lenders.   The asset class has a huge spectrum of risk/return, each of which you'll get a different yield from.

I personally own two:

STAG Industrial:  To me this is about as safe as they come, 300+ industrial buildings, primarily distribution centers setup along interstates with major companies as tenants.  No concentration risks in either markets or tenants.  These properties tend to hold their value or go up and they get nice increases.  Yields in the low 6%s

Entertainment Properties Trust:  This is higher up the risk/return spectrum, focusing on more specialized properties difficult to get bank financing on, such as movie theatres, recreational complexes (Ski Resorts, Top Golf), and childhood education / charter school facilities.   I've owned this thing on and off for 15 years, one of my biggest investment mistakes of my life was not going 100% into this company in the depths of the recession and quadrupled my money.  The movie business is one of the few businesses that improves when times are bad...   Yields close to 8% right now, currently at a nice discount because the market got scared about movies last year and they've got an issue with 2-3% of their revenue on a big daycare tenant.

Do your own research, but those are my holdings.

[ChpBstrd]

I agree with the sentiments on retail REITs. I'll add that office and industrial REITS will be impacted in the next few years as former retail space is converted to offices or warehouses amid a general overcapacity. I'm more optimistic about apartments (e.g. AIV) and healthcare properties - although declining Medicare/Medicaid reimbursements and the repeal of the ACA have greatly impaired the ability of healthcare operators to pay rent.

Case in point: OHI yields about 10%. Its stock price was whacked late last year when a major client started having trouble making rent. You'll note that it did OK through the recent correction, though, and management insists the dividend is safe. I cut my losses on it. YMMV.

Other income options include preferred stocks. PFF and PGF yield 5.6% and 5.4% respectively. However, in a banking crisis like 2008, they would experience some volatility. In 2008-2012, VNQ and PFF performed similarly.

If you still like VNQ, the good news is there's an options market. You could sell cash-secured puts a couple of dollars out of the money at the $72 strike for $1.15, and in 45 days you've either earned the equivalent of a 13% annualized ROI on the cash or you've bought VNQ for about three dollars less than you would pay if you bought today. You could then essentially earn rents on VNQ by selling calls. Rinse and repeat if you don't mind owning it.

[Classical_Liberal]

Case in point: OHI yields about 10%. Its stock price was whacked late last year when a major client started having trouble making rent. You'll note that it did OK through the recent correction, though, and management insists the dividend is safe. I cut my losses on it. YMMV.

I may have bought your shares :)  I'm a huge healthcare REIT fan, OHI in particular. I feel their handling of the situation last year was ethical and think they'll recoup a big chunk of the earning losses they already reported.  OHI is managed very well... and like you said, 10% dividend is juicy as hell.

[gutts]

If you're willing to wait, it seems likely the price of VNQ could get cheaper.  I've found 19% of VNQ's holdings are in the Retail sector which I think will hold it back some.  I've noticed VNQ seems to be selling off shares of SPG (at a loss) which is it's largest holding.  Not sure of the reasoning behind that.  Maybe trying to reduce the Retail holdings?

A mortgage REIT I'm watching is NLY.  Again, I expect it to go lower short term as rate hikes continue but as you mentioned a certain amount may already be priced in.  It's already down 16% since Christmas.  I'm considering a long-term buy and hold at a price below $9.75.  The current annual dividend yield is over 11% so not a bad one to hold and DRIP over the long term but there is still a lot of risk for short term price.  Furthermore, if they reduced the dividend there could be a mass exodus.

Oh wow, 11% made me do a research right after I read your post. Thank you!
So, what's the catch with it? Been on the market since 1996, 11% Dividend yield, currently on sale. Dividend schedule has been pretty neat so far: http://www.annaly.com/investors/stock-information/dividends

I wouldn't mind buying 1500-2000 shares of it even without waiting for it to go down to 9.75 since:
a) It is a long-term hold anyway
b) I don't think it will go down to 9.75 fast, even if it does, an extra round of quarterly distributions for those who bought earlier will cover the price fluctuation

[midwesterner1982]

Oh wow, 11% made me do a research right after I read your post. Thank you!
So, what's the catch with it? Been on the market since 1996, 11% Dividend yield, currently on sale. Dividend schedule has been pretty neat so far: http://www.annaly.com/investors/stock-information/dividends

I wouldn't mind buying 1500-2000 shares of it even without waiting for it to go down to 9.75 since:
a) It is a long-term hold anyway
b) I don't think it will go down to 9.75 fast, even if it does, an extra round of quarterly distributions for those who bought earlier will cover the price fluctuation

Gutts,
I did end up picking up some NLY.  At the time I wrote that it seemed like another Fed rates hike would have chased more ppl out of REITs further reducing the price.  But now it seems the trade war fears might keep the Fed from raising rates so ppl are going back into REITs so price goes back up.  Ex-div date normally around 27-29th this month so still some time to get more on any dips.
I think the catch is the same as any REIT, if they hit a slow period they could lower the dividend causing a race to the exits.  Good point, though, if you're long and just collecting via DRIP then you just buy more when that happens.
I like Marc Lichtenfeld's blog.  Below is another one to watch.  The catch is the company pays out 100% of free cash which means sometimes you get 23% dividend and sometimes nothing.  Again, if you're long and just collecting shares then who cares.
https://wealthyretirement.com/cvr-refining-distribution-you-cant-rely-on-this-23-yield/

[ChpBstrd]

If I were still dividend-chasing and stock-picking, I would prefer PMT over NLY because it is currently possible to establish a costless collar options position on PMT at the $15 and $17.50 strikes through October (translation: buy a put at the $15 strike and sell a call at the $17.50 strike. The debit and the credit are the same. This ensures you won't sell for less than $15 or more than $17.50). You might be able to repeat the stunt for the next 6 mos. Current price is $17.35. Current annual yield is 10.85%.