steady income

Transcription

steady income

10 HIGH YIELD REITS
STEADY INCOME
for
J
ust like the legendary investor Ben Graham, investors today should accept the concept of intrinsic value
as a method of determining what a company is worth. Then, more importantly, one must apply it to the
area of investing in order to get an advantage above the market.
Most investors know that one way to gain an edge in the market is to own stocks that pay high dividends.
Yet, the world is scattered with stocks that pay high dividends, as the equity markets provide an attractive
opportunity for investors to receive predictable income while retaining the possibility of share price
appreciation. What’s more, a dividend is an important barometer for investors, as it provides certainty about
a company's financial well-being.
One of my primary methods of valuing quality stocks is to examine the company’s pattern of dividend
payments—or its dividend record. In doing so, you can get meaningful clues that assist in determining whether
or not the particular business is considered sound or speculative.
Dividends are also attractive for investors looking to secure current income. Companies that have a
long-standing history of stable dividend payouts would be negatively affected by cutting or omitting dividend
distributions. Likewise, these companies would be positively affected by increasing dividend payouts or
making additional payouts of the same dividends.
REITs Provide Patterns of Predictability
That also applies to real estate investment trusts, or REITs; an asset class differentiated by the powerful force
of nature I refer to as “dividend repeatability.”
What makes REITs unique from the other asset classes is the fact that these companies must pay out at
least 90% of taxable income (in the form of dividends), and that provides a disciplined and consistent
alternative to controlling risk in your portfolio.
The dependability of dividends is the major reason why investors own REITs, and that is also one of the
primary attractions to the high-dividend-paying asset class. Finding REITs with above-average appreciation
potential and safe and growing dividends is the secret sauce to wealth creation.
One of the primary objectives of investing in REITs is to realize capital appreciation. When you add in the
REIT dividends that you receive, this can make the stock even that much more attractive. The high yield makes
investing in a particular stock that much more profitable.
Since dividends make up roughly 60% of a REIT’s total return, the foundation for wealth creation is rooted
in the sustainability of the earnings model. That’s why the REITs that have been able to achieve a long history
of consistent dividend growth have been able to weather the storms the best and they are also the ones that
have demonstrated a consistent track record of profitability.
Summed up, when a company has a long-term track record for consistent and rising dividend payments,
there is simply no better indicator about the state of the company’s financial health.
When a dividend is increased the stock price will inevitably rise to reflect the increase in value. That’s why
I’m going to clue you into a few REIT gems that have weathered a myriad of storms to inevitably survive and
maintain a rising dividend trend.
W W W. F O R B E S . C O M / N E W S L E T T E R S
2
One of my favorite REITs is Realty Income (O), which is known as “The Monthly Dividend Company.”
First off, any company that would brand itself as such is serious about its goals and objectives—to fork out
consistent dividends. Think about it, if this company cut or suspended its dividend, it would have to create
an entirely new branding campaign.
However, given the very consistent and reliable dividend patterns with Realty Income, I see no sign of
anything but dividend growth. Since the San Diego-based REIT commenced as a public company more
than 20 years ago, it has paid and increased dividends every single year, through multiple recessions,
including the Great Recession.
The FASTGraph below provides a clear illustration of a company that has provided a steady and reliable
earnings stream. The shaded aqua blue area represents dividends paid. The dark green area represents
share price appreciation.
Since going public in 1994, Realty Income has returned more than 2,265% compared to the S&P 500 that
grew by 546%. The success of its business model has everything to do with the pattern of dividend repeatability.
Today I consider Realty Income soundly valued. Shares are priced at $47.63 with a price-to-funds-fromoperations (or P/FFO) multiple of 18.3x. The dividend yield is 4.6%. I don’t consider the shares priced to
perfection; I would wait for a modest market pullback or an entry price of $45.00.
3
Another REIT that has a similar pattern of dividend repeatability is Tanger Factory Outlets (SKT). This
Greensboro, NC-based REIT is the only pure play outlet center REIT and the company was somewhat of
a pioneer of the open outlet shopping experience.
As a public company, Tanger has demonstrated exceptional risk control by delivering steady and
increased dividends consecutively for more than 20 years. As evidenced by the FASTGraph below, you can
see that Tanger has maintained very predictable profit margins through multiple recessions.
4
Since going public in 1993 Tanger has returned more than 2,048% compared to the S&P 400 that grew
by over 610%. Tanger is considered a blue chip REIT and while the 2.7% dividend yield may look modest,
the value is indicative of the very reliable profits that this REIT generates.
Tanger is trading at $36.20 with a P/FFO multiple of 18.2x. As much as I like this stock I would wait for
a market pullback that should improve your margin of safety. My buy recommendation is $34.00.
Another REIT jewel is HCP. After 29 years, this diversified health care REIT continues to increase its
dividend on a yearly basis, even during the bear market of 2008-2009, and it is also the only REIT from the
S&P 500 to be a dividend aristocrat. As the FASTGraph illustrates below, HCP has managed to build an
exceptional model of predictability.
5
Since going public in May 1985 HCP has returned more than 5,160% compared to the S&P 500 that
grew by 850%. Shares are trading at $44.83 today with a sound valuation multiple of 14.8x P/FFO. The
dividend yield is 4.9%. I would recommend buying HCP at the current share price.
It's not every day that you find a blue chip on sale but the stars were lined up when I took full advantage
of the mispricing of Digital Realty (DLR) earlier this year. I knew that Digital's moat was strong and that
eventually Mr. Market would recognize the company as a market leader with sustainable competitive
advantages well equipped to preserve long-term pricing power and profitability.
6
While some may not consider Digital Realty a blue chip stock I believe that the company's history for
managing risk illustrates the true competitive advantages that the market is now recognizing. With an
investment grade balance sheet (BBB from all three rating agencies), Digital has demonstrated skillful risk
control throughout difficult economic times. During the Great Recession it maintained and increased its
annual dividend and that’s one of the primary reasons I own the shares today.
DLR is currently trading at a price of $68.25 with a P/FFO multiple of 13.9x. As much as I like this REIT,
I would wait for a market pullback so that you can get a better margin of safety. The current dividend yield
is 4.9% so I would look for a $65.00 entry price that will provide a going-in yield of around 5%.
7
Ventas (VTR) is pound for pound one of the best dividend payers in REIT-dom, especially over the last four
years. As one of the largest health care REITs in the sector, I like Ventas because of its very predictable dividend
performance. Notably, the Chicago-based REIT has increased its annual dividend by 10% over the last three years.
In addition (and as illustrated below), Ventas has never cut its dividend and that helps me sleep well at night.
Currently the dividend yield is 4.2% and while I consider that a little weak, nobody can argue the
reliability of the dividend stream. Today Ventas trades at $69.11 with a P/FFO multiple of 15.5x. Value
investors should look for a better price and I would recommend an entry price of $65.00.
8
W.P. Carey (WPC) has also maintained a consistent record of predictable dividend growth. Since going
public in 1998 the company has increased its divided every year with growth averaging 5% (from 1998
through 2013). With a global footprint and more than 690 properties Carey has built a durable platform of
free-standing assets, the majority of which enjoy CPI-based rent increases.
Carey is trading at sound value today, $68.10 per share. With a P/FFO of 14.5x I don’t consider the stock a
bargain but I believe one’s principal is safe. As noted above, Carey has maintained a very reliable and predictable
dividend history and the current yield of 5.5% isn’t bad. The estimated FFO/share payout for 2014 is $4.34 with
expected dividends paid (per share) of $3.60. I would look for a modest pullback in share price or around $65.00.
9
Omega Healthcare Investors (OHI) may not be the trophy REIT you would expect to buy like Park
Place of Boardwalk, but I consider the dividend history to be highly predictable. In addition, Omega
recently announced it was merging with Aviv REIT (AVIV) and the combined companies will enjoy a much
more diverse platform with more than $10 billion in assets.
Omega's core revenue has grown steadily: 19.1% CAGR from 2004 through 2013 and it has increased its
annual dividend by 12% since 2006. One thing I like about Omega is that it has increased its quarterly
dividend by $.01 per share for 11 quarters in a row.
10
OHI's current share price is $38.06 with a P/FFO multiple of 13.8x. The current dividend yield is 5.5%.
A 10% share price rollback would move the shares closer to my buy target of $35.00. For me, that would be
an ideal entry point to begin to establish a long-term strategy.
I have admired National Retail Properties (NNN) for quite some time but I have not been able to
find an adequate margin of safety. Remember, finding attractive dividend-paying stocks is only one piece
of the puzzle. Buying them is another piece.
National Retail has maintained a very consistent earnings stream and the company’s track record of
steady and reliable dividends is illustrated below.
11
Always remember, the dividend yield is a great proxy for measuring investment risk and I will wait
patiently to own shares in hopes that I can get a yield better than the current one offered of 4.3%. NNN is
currently trading at $38.97 with a P/FFO multiple of 19x. Remember that the company has increased its
annual dividend payout 24 consecutive years in a row (represents the fourth longest record of all public
REITs and 98% of all public companies). My buy target is $35.00.
In addition to the above-named highly predictable dividend payers, I wanted to also mention a few
small-cap REITs you should consider.
STAG Industrial (STAG) and Chambers Street (CSG) are both industrial REITs and although not
as experienced as the other eight REITs I discussed above, they are both beginning to build a track record—
they also pay monthly dividends.
I believe now is a great time to take a more tactical approach to your dividend income based upon the
premise that REIT prices are moving back up in line with a growing economy. I'm not advocating that
investors should load up the truck with REIT income, but I do consider a 10% to 20% slice of highly
predictable REIT income sound.
Remember, a lot of interest rate risk has already been baked into REIT shares, and that has provided a
better margin of safety for dividend income investors.
Conversely, an income investor should also take advantage of the market opportunity to increase
dividend income. An intelligent dividend investor should recognize that now is a terrific time to put money
to work, and while REIT prices are down (from the highs over a year ago), fundamentals are strong and the
economy is improving. Many REITs are now increasing dividend payouts, and that's the best possible
evidence that the security is safe and management has an alignment of interests with shareholders.
Typically, a company with an established trend of increasing its dividends will raise them again next
year and the year after that and the year after that, unless it becomes impossible to do so. It's hard to stop
a dividend train.
Brad Thomas is the editor of The Intelligent REIT Investor newsletter.
Disclosure: I own shares of Realty Income, Omega Healthcare Investors, W.P. Carey, Ventas and
Digital Realty Trust.
12

steady income

Transcription

Similar documents

Malta International Airport

View PDF - Energy and Capital

Winter 2014 Newsletter - Fresno Police Department Credit Union

Monkey Business Monkey Business

Alaska Permanent Fund Designed for Sustainability

Opportunity Day

Explaining Investor Preference for Cash Dividends