Real estate investment trusts (REITs) have momentum now. And dont let their terrific 2019 scare younext year is setting up to be even better thanks to Jay Powells gang of doves!
Ill reveal three strong REITs for 2020 at the end of this article. Together they give you growing dividends that double (and even triple) the markets payout. And to be honest, one isnt exactly a REITits a REIT-owning closed-end fund (CEF) that drops a huge 6.5% dividend into your account every month.
REITs: The Ultimate Rate-Proof Play
First, no matter what Jay Powell says, you can take this to the bank: more rate cuts are on the table as the on-again, off-again trade war lingers and the president batters the poor fellow tweet by tweet.
Thats why Im betting on another Powell pivot toward rate cuts in 2020, just like we saw in January. Im sure I dont have to tell you what that did for REITs:
Powells Flip-Flop Ignites REITs
But what if Im wrong and rates take a surprise jump next year?
Good news: REITs will be just fine, because rising rates go hand in hand with economic growth (the side of the story everyone ignores), which drives up REITs occupancy and rents.
But rising rates do tend to separate the stars from the duds in REIT-land, so youll want to snap up trusts with highand risingpayouts (as dividend growth is a key share-price driver).
No matter what happens with rates, youll need your payout locked in by rising funds from operations (FFO, the REIT equivalent of earnings per share) and a safe payout ratio (because of REITs steady cash flows, safe is usually anything below 90%).
Better still if your REIT is riding a megatrend like, say, aging baby boomers.
We Bagged 109% Gains From This REIT as Rates Rose
A good example? Medical Properties Trust (MPW), which I recommended in Contrarian Income Report in late 2015, in the run-up to the Feds first hike since before the Great Recession.
MPW ticked all my boxes, starting with its niche as the only publicly traded firm investing solely in licensed hospital facilities (of which folks 65 and up are the biggest users). Back then, MPW was pumping out cash: FFO had soared 82% in the preceding five years.
That was showing up in the dividendthe payout edged up 5% in each of the preceding two years. And bear in mind this payout was already starting from a high bar, with a mammoth 7.6% yield!
What happened?
As rates headed higher, MPW crushed the market. In fact, by the time the Fed said it would stop raising rates in December 2018, MPW had tripled the S&P 500s return!
Rates Rise, MPW Soars
We held on as this rate-proof REIT kept soaring, even after Powells January pivot. But by March 2019, with our total return hitting 109% and MPWs dividend whittled down to 6.1%, it was time to check out.
MPW is a great example of how a well-chosen REIT can hand you big gains (and dividends) no matter what rates dowhich brings me to the three real estate plays I have for you today.
Rate-Proof REIT No. 1: National Health Investors (NHI)
NHI picks up where MPW left off: its a 5.2%-yielder that also invests in medical facilities, but it focuses on seniors housing and skilled-nursing facilities, rather than hospitals, making it an even better play on our aging population.
NHI drops cash into these properties and nails down strong returns on its money. One way it does so is through sale-and-leaseback deals (where owners sell their facilities to NHI, then lease them back, giving the REITand ussteady income).
The result? NHI crushed the average REIT in the last decade, with much of that gain in cash, thanks to its high payout and 62% dividend growth:
NHI Rides Its Dividend to 347% Returns
A big benefit of healthcare REITsincluding NHIis that they dial back your portfolios volatility.
Heres what I mean: NHIs beta rating is 0.27, making the stock 73% less volatile than the market. This also means the REIT can (and does) rise in a meltdown, which is exactly what happened at the end of 2018:
Market CollapsesNHI Owners Profit
Finally, NHIs payout ratio, at 83% of the midpoint of forecast 2019 FFO, means the dividend is safe and has room for further growth.
Rate-Proof REIT No. 2: National Retail Properties (NNN)
National Retail Properties, payer of a 3.7% dividend, has a setup almost as slick as MPWs: it owns outdoor malls whose tenants rent under a triple-net-lease model, where they pay all the bills: maintenance, insurance, and utilities.
NNN? It simply collects the checks!
Tenants include 7-Eleven, Mister Car Wash, Camping World, LA Fitness and AMC Theaters (AMC), as well as restaurant chains like Chuck E. Cheese and Frischs. I think youll agree that this isnt exactly a lineup of Amazon.com (AMZN) victims.
As you can imagine, triple-net leases lead to smoother FFO growth, because they pass off many big, unpredictable expenses to the tenant. Thats exactly what weve seen with NNN:
Source: National Retail Properties 2018 annual report
The REIT just raised its guidance and now sees 2020 FFO of $2.79 to $2.82 a share. That estimate easily supports the dividendwhich yields 3.7% and is just 73% of the forecasts midpoint. That FFO growth also sets the table for higher dividends, on top of the 23% payout increase investors have enjoyed in the last five years.
Rate-Proof REIT No. 3: Cohen & Steers Quality Income Realty Fund (RQI)
Finally, were going to boost our yield a bit higher with RQI, the CEF I mentioned off the topit pays an outsized 6.5% payout every month:
RQIs Dividend Matches Your Monthly Bills
Source: CEF Connect
I usually prefer buying REITs individually, so I can focus on sectors with strong prospects, like healthcare. But Ill make an exception for RQI, which diversifies across the REIT space and gives you some exposure to preferred shares, another high-yield vehicle too many people ignore.
In fact, RQIs sector weighting lines up almost exactly with the REIT sectors I see performing best next year:
Source: Cohen & Steers Quality Income Realty Fund fact sheet
There is one caveat here: RNQ trades at a 0.54% premium to its net asset value (or slightly more than the value of its portfolio holdings). But thats worth paying for this management team, which has nailed down the top return, based on market price, of any US-focused REIT CEF since launch at 10.4% annualized.
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