REITs, or real estate investment trusts, are considered defensive investments since they are relatively steady regardless of market conditions. Investors have scooped up REITs amid inflation concerns in 2021, and Cramer believes the assets have even more space to run.
“I realize they’re uninteresting. “Interest is the last thing we need right now,” Cramer added. “If your eyes start to glaze over, go get some Visine because these are the types of equities you can buy into the weakness.”
The host chose ten REITs that he would recommend to investors looking for a stable return.
Are REITs considered defensive stocks?
People will always require shelter, thus apartment real estate investment trusts (REITs) are considered defensive. Avoid REITs that specialize in ultra-high-end apartments when seeking for defensive plays.
Why REITs are a bad idea?
Because no investment is flawless, you should be aware of the possible negatives of REITs before incorporating them into your portfolio.
- Dividend taxation: REITs pay out higher-than-average dividends and aren’t subject to corporate taxation. The disadvantage is that REIT payouts don’t always qualify as “qualified dividends,” which are taxed at a lower rate than ordinary income.
- Interest rate sensitivity: Because rising interest rates are detrimental for REIT stock values, REITs can be extremely sensitive to interest rate movements. When the rates on risk-free investments like Treasury securities rise, the returns on other income-based investments rise as well. The yield on the 10-year Treasury is an excellent REIT indication.
- Real estate investment trusts (REITs) can help diversify your portfolio, but most REITs aren’t highly diversified. They tend to concentrate on a single property type, each with its own set of dangers. Hotel REITs, for example, are extremely vulnerable to economic downturns and other factors. If you decide to invest in REITs, it’s a good idea to pick a few with varying degrees of economic sensitivity.
- Fees and markups: While REITs provide liquidity, trading in and out of them comes at a significant price. The majority of a REIT’s fees are paid up front. They can account for 20% to 30% of the REIT’s total worth. This consumes a significant portion of your prospective profit.
What are defensive investments?
To maintain an appropriate asset allocation, a defensive investment strategy requires regular portfolio rebalancing. Buying high-quality, short-maturity bonds and blue-chip stocks, diversifying across industries and nations, placing stop loss orders, and holding cash and cash equivalents in down markets are all part of the strategy. These tactics are designed to safeguard investors against severe losses in the event of a major market downturn.
Defensive investment techniques are intended to provide security first, followed by modest growth. An investor who employs an offensive or aggressive investment strategy, on the other hand, attempts to profit from a rising market by purchasing securities that outperform for a given degree of risk and volatility.
Options trading and leverage trading may also be part of an offensive strategy. Active management is required for both offensive and defensive investment strategies, thus they may have higher investment fees and tax liabilities than a passively managed portfolio. A balanced investing strategy incorporates both defensive and offensive features.
When it comes to portfolio management, a defensive investment strategy is one of several alternatives. Portfolio management is both an art and a science, and portfolio managers must make crucial decisions for themselves or their clients while balancing risk and possible profit.
For risk-averse clientele, such as pensioners without a consistent income, many portfolio managers use defensive investment techniques. Defensive investment strategies may be acceptable for those who do not have a lot of money to lose. In both circumstances, the goal is to conserve existing capital while maintaining a modest growth rate to keep up with inflation.
What are considered defensive sectors?
Defensive stocks tend to do better in a sinking market due to the continuing demand for their products. Utilities, consumer staples, and health care are the three key defensive industries.
Utilities such as water, gas, and electricity are required at all stages of the economic cycle. Utilities are normally categorised as “US Large Value” in the United States.
Implementation: As part of our US Large Value allocation in our Core 60 portfolio, we may use a utilities fund to the tune of 25% or more. This indicates that utilities could account for 2.75 percent or more of the 10.5 percent allotted to US Large Value.
Even in the midst of a recession, everyday things are still purchased. Food, beverage, household and personal product manufacturers, as well as packaging manufacturers, fall into this category. Although consumer staples are normally categorised as US Large Value, certain funds are designated as US Small Blend.
Implementation: As part of our US Large Value or US Small Blend asset classes, we may deploy up to 25% of a consumer staples fund in our Core 60 portfolio.
People place a high value on health care and medicine. Hospitals, pharmaceutical firms, medical equipment and supply manufacturers, and long-term care institutions all fall under the category of health care. Although health care is classed as US Large Blend, some finances are classified as US Small Blend.
Implementation: A health care fund may account for 25% or more of our Core 60 portfolio’s US Large Growth, US Large Blend, or US Small Blend asset classes.
Are REITs safer than stocks?
REITs that are publicly traded face a number of risks. REITs that are publicly traded provide investors with an opportunity to add real estate to their portfolio while also earning a healthy dividend. Although publicly traded REITs are safer than non-exchange REITs, there are always hazards.
Is investing in REITs a good idea?
REITs are a significant investment for both retirement savings and retirees who want a steady income stream to fund their living expenditures because of the high dividend income they generate. Because REITs are obligated to transfer at least 90% of their taxable profits to their shareholders each year, their dividends are large. Their dividends are supported by a consistent stream of contractual rents paid by their tenants. REITs are also an useful portfolio diversifier due to the low correlation of listed REIT stock returns with the returns of other equities and fixed-income investments. REIT returns tend to “zig” while other investments “zag,” lowering overall volatility and improving returns for a given amount of risk in a portfolio.
- Long-Term Performance: REITs have delivered long-term total returns that are comparable to those of other stocks.
- Significant, Stable Dividend Yields: REIT dividend yields have historically provided a consistent stream of income regardless of market conditions.
- Shares of publicly traded REITs are readily available for trading on the major stock exchanges.
- Transparency: The performance and prognosis of listed REITs are monitored by independent directors, analysts, and auditors, as well as the business and financial media. This oversight offers investors with a level of security as well as multiple indicators of a REIT’s financial health.
- REITs provide access to the real estate market with low connection to other stocks and bonds, allowing for portfolio diversification.
Weak Growth
REITs that are publicly listed are required to pay out 90% of their profits in dividends to shareholders right away. This leaves little money to expand the portfolio by purchasing additional properties, which is what drives appreciation.
Private REITs are a good option if you enjoy the idea of REITs but want to get more than just dividends.
No Control Over Returns or Performance
Investors in direct real estate have a lot of control over their profits. They can identify properties with high cash flow, actively promote vacant rentals to renters, properly screen all applications, and use other property management best practices.
Investors in REITs, on the other hand, can only sell their shares if they are unhappy with the company’s performance. Some private REITs won’t even be able to do that, at least for the first several years.
Yield Taxed as Regular Income
Dividends are taxed at the (higher) regular income tax rate, despite the fact that profits on investments held longer than a year are taxed at the lower capital gains tax rate.
And because REITs provide a large portion of their returns in the form of dividends, investors may face a higher tax bill than they would with more appreciation-oriented investments.
Potential for High Risk and Fees
Just because an investment is regulated by the SEC does not mean it is low-risk. Before investing, do your homework and think about all aspects of the real estate market, including property valuations, interest rates, debt, geography, and changing tax regulations.
Fees should also be factored into the due diligence process. High management and transaction fees are charged by some REITs, resulting in smaller returns to shareholders. Those fees are frequently buried in the fine print of investment offerings, so be prepared to dig through the fine print to find out what they pay themselves for property management, acquisition fees, and so on.
Is REIT a good investment in 2021?
Three primary causes, in my opinion, are driving investor cash toward REITs.
The S&P 500 yields a pitiful 1.37 percent, which is near to its all-time low. Even corporate bonds have been bid up to the point that they now yield a poor return compared to the risk they pose.
REITs are the last resort for investors looking for a decent yield, and demographics support greater yield-seeking behavior. As people near retirement, they typically begin to desire dividend income, and the same silver tsunami that is expected to raise healthcare demand is also expected to increase dividend demand.
The REIT index’s 2.72 percent yield isn’t as high as it once was, but it’s still far better than the alternatives. A considerably greater dividend yield can be obtained by being choosy about the REITs one purchases, and higher yielding REITs have outperformed in 2021.
Are REITs safe during a recession?
It’s crucial to remember that nothing can fully protect you against a recession. Any venture has weaknesses and hazards, and each economic downturn presents new obstacles.
While no recession is the same as the last, there are some real estate sectors that are more robust during a downturn. Real estate investments that meet people’s basic requirements, such as housing and agriculture, or that provide important services for economic activity, such as data processing, wireless communications, industrial processing and storage, or medical facilities, are more likely to weather the storm.
Investors can own and manage properties in any of the asset classes, but many prefer to invest in real estate investment trusts (REITs) (REIT). REITs can be a more affordable and accessible method for investors to enter into real estate while also obtaining access to institutional-quality investments in a diversified portfolio.
Data centers
We live in a data-driven technology era. Almost everything we do now requires data storage or processing, and the demand for data centers will only grow in the next decades as more technological or data-driven gadgets are released. During recessions, more people stay at home to watch TV, use their computers or smartphones, or, in the case of the recent coronavirus outbreak, work from home, increasing the need on data centers. According to the National Association of Real Estate Investment Trusts, there are currently five data center REITs to select from, with all five up 33.73 percent year to date (NAREIT).
Self-storage
Self-storage is widely regarded as a recession-proof asset type. As budgets tighten, some families downsize, relocating to other places to better their quality of life or pursue a new work opportunity, or downsizing by moving in with each other to save money. This indicates that there is a higher need for storage.
The COVID-19 pandemic, on the other hand, has had an unforeseen influence on the storage industry. While occupancy has remained high, eviction moratoriums and increasing cleaning and safety costs have resulted in lower revenues. According to NAREIT, self-storage REITs are down 3.51 percent year to date. However, this industry is expected to recover swiftly, particularly for companies like Public Storage (NYSE: PSA), the largest publicly traded self-storage REIT, which has a strong credit rating and a diverse portfolio.
Warehouse and distribution
E-commerce has altered the way our economy works. Demand for quality warehousing and distribution centers has soared as more consumers purchase from home than ever before. Oversupply of industrial space, particularly warehouse and distribution space, is a risk, given that this sector has been steadily growing for the past decade; however, as a result of COVID-19, it has already proven to be the most resilient asset class of all commercial real estate, making it an excellent choice for a recession-resistant investment. Prologis (NYSE: PLD), one of the major warehousing and logistics REITS, and Americold Realty Trust (NYSE: COLD), a REIT that specializes in cold storage facilities, have both proven to be quite durable in the present economic situation, with plenty of space for expansion.
Residential housing
People will always require housing. Residential housing, which can range from single-family homes to high-rise flats or retirement communities, fulfills a basic need that is necessary even in difficult economic times. During economic downturns, rents may stagnate and evictions or foreclosures may increase, but residential rentals are a relatively reliable and constant source of income. Despite the COVID-19 challenges, American Homes 4 Rent (NYSE: AMH), which specializes in single-family rental housing, and Equity Residential (NYSE: EQR), which specializes in urban high-rises in high-density areas, are two of the largest players in residential housing, both of which have maintained high occupancy and collection rates.
Agriculture
Aside from housing, agriculture and food production are two additional critical services on which our country and the rest of the world rely. Our existing food system is primarily reliant on industrial agriculture, but more and more autonomous and regenerative agricultural projects are springing up, allowing for more crop diversification, increased productivity, and reduced economic and environmental risk.
Wireless communication
Wireless communication has grown into a giant sector, with American Tower (NYSE: AMT) and Crown Castle International (NYSE: CCI) being two of the world’s largest REITs. Cell tower REITs that provide telecommunication services are an important part of our world today, and while growth prospects can be difficult to come by, very good track records and rising demand make this a terrific real estate investment that will weather any economic downturn.
Medical facilities
Medical facilities, senior housing, hospitals, urgent care clinics, and surgery centers all provide a vital service that will always be in demand, even during economic downturns.
Retail centers
Before you abandon ship when you see this category, let me state unequivocally that retail is not dead, at least not in all forms. Grocery stores and other retail outlets that provide critical services and products will continue to be in demand, as they did during the last pandemic. The issue here is for retail REITs to invest in the vital service sector with such focus that other sectors such as tourism, restaurants, or general shopping and goods do not put the company or investment at risk.
What are sensitive stocks?
- An interest sensitive stock is one that is particularly affected by interest rate movements.
- Interest-sensitive stocks include financial institutions, highly leveraged enterprises, and companies that pay significant dividends.
- Because of how their industry or business model operates, some stocks are more sensitive to interest rates; for example, utilities, REITs, and telecommunications companies frequently pay significant dividends and are frequently purchased for the income they create for investors.
What are aggressive investments?
An aggressive investment strategy is a portfolio management method that aims to maximize returns by taking on a higher level of risk. Capital appreciation, rather than income or principal protection, is often emphasized as a main investment goal in strategies for attaining higher-than-average returns. As a result, such a strategy would have an asset allocation that heavily favors equities, with little or no exposure to bonds or cash.
Young folks with smaller portfolios are often assumed to benefit from aggressive investment tactics. Because a long investment horizon allows them to ride out market fluctuations and losses early in one’s career have less impact than losses later in one’s career, investment advisors do not recommend this strategy for anyone other than young adults unless it is only a small portion of one’s nest-egg savings. However, regardless of the age of the investor, a high risk tolerance is a must for an aggressive investment approach.
