Real estate investment trusts (REITs) offer natural inflation protection. When prices rise, so do rentals and values in real estate. This helps REIT dividend growth and ensures a steady supply of income, especially during periods of high inflation.
In all but two of the last twenty years, REIT dividends have exceeded inflation as assessed by the Consumer Price Index.
Directly comparing REIT dividend growth with inflation is a practical technique to measure the inflation protection provided by REITs. Dividend growth in REITs have exceeded inflation in all but two of the last 20 years, as assessed by the Consumer Price Index.
Commodities and Treasury inflation-protected securities (TIPS) are examples of investments that can provide good inflation protection. Stocks, too, can play a role in a portfolio that shields investors from inflationary shocks.
Are REITs a good inflation hedge?
Most REITs can be bought and sold on public exchanges much like stocks, making them extremely liquid investments. REITs aim to provide investors with a continuous stream of income as well as tax benefits. The corporation must follow regulations regarding the mix of its assets, the source and distribution of revenue, the number of shareholders and the concentration of shares, among other things, in order to qualify as a REIT.
REITs, like direct real estate investments, may have the potential to be effective inflation hedges. However, REITs, like direct ownership, are subject to risk and may lose value. As a result, each investor must examine their risk tolerance and select which hedges are acceptable and appropriate for them.
Do REITs fare well in the face of rising inflation?
Gladstone’s leases range from five to ten years in length, with annual escalations and upward market adjustments or participation aspects included in several. This means that a portion of farmers’ gains from higher food prices are passed on to the REIT, but the base rent remains the same when food prices fall.
Gladstone’s ability to protect investors from inflation has already been recognized by the market, and the stock price has skyrocketed while the dividend yield has plummeted as a result. However, a yield of 1.7 percent is still roughly half a percentage point greater than the average yield of the S&P 500, and the yield is expected to rise over time. Continued food price rise should boost Gladstone’s earnings and boost the value of its thousands of acres of farmland even more.
Are REITs a decent investment during a downturn?
Since 1991, U.S. REITs have outperformed the S&P 500 by more than 7% annually in late-cycle periods and have provided considerable downside protection in recessions, highlighting the potential value of conservative, lease-based revenues and high dividend yields in an uncertain environment (see chart below).
In 2021, are REITs a viable investment?
REITs provide investors with a number of advantages that make them an excellent addition to any investment portfolio. Competitive long-term performance, attractive income, liquidity, transparency, and diversification are just a few of them.
Competitive long-term performance
REITs have historically outperformed stocks, especially over lengthy periods of time. REITs, as assessed by the FTSE Nareit Composite Index, have generated a compound annual average total return (stock price appreciation plus dividend income) of 11.4 percent over the last 45 years. That’s only a smidgeon less than the S&P 500’s annual return of 11.5 percent over the same time period.
During various occasions, REITs have outperformed stocks. For example, during the last three, five, ten, fifteen, twenty, twenty-five, twenty-five, thirty, thirty-five, and forty years, they have outperformed small-cap equities as assessed by the Russell 2000 Index. Small-cap companies have only outperformed REITs once in the last year. Meanwhile, during the last 20 years, 25 years, and 30 years, REITs have outperformed large-cap equities (the Russell 1000 Index). Finally, they’ve outperformed bonds over the previous 40 years in every historical period.
Attractive income
The fact that most REITs pay attractive dividends is one of the reasons they have earned strong total returns over time. In mid-2021, for example, the average REIT yielded over 3%, more than double the dividend yield of the S&P 500. Over time, the income mounts up because it accounts for the majority of a REIT’s total return.
REITs pay high dividends because they are required to release 90% of their taxable income to comply with IRS laws. Most REITs, on the other hand, pay out more than 90% of their taxable income since their cash flows, as measured by funds from operations (FFO), are sometimes significantly greater than net income due to REITs’ proclivity for recording significant amounts of depreciation each year.
Many REITs have a strong track record of raising dividends over time. Federal Realty Investment Trust, for example, raised its dividend for the 53rd year in a row in 2021, the longest streak in the REIT business. Several other REITs have a long history of boosting their payouts at least once a year.
Liquidity
Real estate is an illiquid investment, which means that it is difficult to convert into cash. Consider the case of a single-family rental (SFR) property owner who needs to sell to finance a large expense. In that situation, they’d have to put the house on the market, wait for a suitable offer, and hope that nothing goes wrong on the way to closing. Depending on market conditions, it could take months before they can convert the property into cash. A real estate agent charge, as well as other closing costs, would almost certainly be required.
If a REIT investor needed money, on the other hand, they could click into their online brokerage account and sell REIT shares whenever the market was open. A REIT investor would also avoid paying commissions when selling because most brokers do not charge commissions.
Transparency
Many private real estate investments are run with little or no supervision. As a result, real estate sponsors may make judgments that aren’t necessarily in their investors’ best interests.
REITs, on the other hand, are quite transparent. The performance of REITs is monitored by independent directors, analysts, auditors, and the financial media. They must also file financial reports with the Securities and Exchange Commission (SEC). This oversight provides a layer of safety for REIT investors, ensuring that management teams are unable to take advantage of them for personal gain.
Diversification
REITs allow investors to diversify their portfolios throughout the commercial real estate industry, reducing their reliance on stock and bond markets. This diversification reduces an investor’s risk profile while not lowering rewards.
For example, with a Sharp Ratio of 0.27 and a standard deviation of 10, a typically balanced portfolio of 60% equities and 40% bonds has historically earned a bit higher than 7.8% return over the past 20 years. The Sharp Ratio compares risk to a risk-free investment, such as a US Treasury bond, with a higher number reflecting a better risk-adjusted return. The standard deviation, on the other hand, is a statistical measure of volatility, with a greater figure indicating a riskier investment. For the sake of comparison, a more aggressive strategy of 80 percent stocks and 20 percent bonds has historically produced around 8.3%, but with a Sharp Ratio of 0.17 and a standard deviation of more than 13.
- With a Sharp Ratio of 0.34 and a standard deviation of around 10.5, a 55 percent stock/35 percent bond/10 percent REIT portfolio has historically provided a yearly return of around 8.3 percent.
- A 40 percent stock/40 percent bond/20 percent REIT portfolio has historically had an annualized return of slightly more than 8.4%, with a Sharp Ratio of 0.46 and a standard deviation of less than 10.
- With a Sharp Ratio of 0.49 and a standard deviation of roughly 11.5, a 33.3 percent spread across stocks, bonds, and REITs has yielded an almost 9% average annual rate of return.
As a result, adding REITs to a portfolio should help it produce superior risk-adjusted returns by reducing volatility.
Are REITs a decent stock-market hedge?
REITs are a cross between mutual funds and real estate investment trusts. Although they trade like stocks, their dividend yields can be comparable to trash bonds. I purchased two of them in late MarchStarwood Property Trust (symbol STWD) and Apollo Commercial Real Estate Finance (ARI)because I believe REITs should be part of every well-diversified portfolio. REITs offer stock market returns, but they don’t always move in lockstep with the market. As a result, holding REITs can help you diversify your portfolio without sacrificing profits. Even better, REITs are a solid inflation hedge because rents and real estate values tend to rise in tandem with rising prices.
REITs, on the other hand, vary from conventional corporations in that they are more difficult to assess. REITs engage in real estate or real estate-related debt. 90% of REITs own properties and rely on rentals for the majority of their revenue. Furthermore, by law, all REITs must transfer 90% of their earnings to their stockholders.
Is Warren Buffett a REIT Owner?
STORE Capital (STOR -2.56 percent ) is not just a stock in Berkshire Hathaway’s (BRK. A 0.83 percent )(BRK. B 0.70 percent ) stock portfolio, but it is also the only real estate investment trust (REIT) in which Warren Buffett’s conglomerate has invested its own money.
Which REITs are the safest?
These three REITs are unlikely to appeal to investors with a value inclination. When things are uncertain, though, it is generally wise to stick with the biggest and most powerful names. Within the REIT sector, Realty Income, AvalonBay, and Prologis all fall more broadly into that category, as well as within their respective property niches.
These REITs are likely to have the capital access they need to outperform at the company level in both good and bad times. This capacity should help them expand their leadership positions and back consistent profits over time. That’s the kind of investment that will allow you to sleep comfortably at night, which is probably a cost worth paying for conservative sorts.
In 2022, are REITs a viable investment?
To summarize, we believe that REITs provide some of the strongest risk-to-reward opportunities in today’s market because:
We’re in a period of rising inflation and ultra-low interest rates, which is great for landlords and borrowers.
REIT valuations have just recently recovered to pre-COVID levels, which were also historically low.
REITs have consistently outperformed during rising interest rate cycles, and they are particularly well-positioned to tackle another one today.
After years of undersupply, several property industries now have above-average growth potential, both internal and external.
Some REIT property sectors are currently mispriced, presenting chances for diligent investors to earn alpha-rich returns.
You may put your money into a REIT ETF (VNQ) and expect good returns in the next years. Those who can spot the biggest mispricings, on the other hand, are likely to make the most money. That’s what we’re aiming towards.
In 2021, how will REITs fare?
Real estate investment trusts will be one of the sectors that investors will remember in 2021. (REITs). REITs increased 40 percent as a group, compared to a 27 percent rise for the Standard & Poor’s 500 Index. That’s a remarkable outperformance for a market segment that is supposed to pay dividends rather than develop at a breakneck speed.
But there are a few points to keep in mind here that will help explain the massive profits and why investors shouldn’t expect a repeat performance in 2022.
Do REITs pay dividends every month?
Dividend-paying stocks are a natural option for investors who want to build wealth over time and for retirees who want to live off their investments.
Both of these needs can be met by real estate investment trusts (REITs). There are also a few dozen REITs that pay monthly rather than quarterly dividends, which helps to level out the revenue stream.