Equity REITs: Still Worth the Investment?

Equity REITs, which invest typically in commercial buildings, apartments and other properties, have been a hot asset class over the past 14 months. As a sector, REITs are up about 30% since January of last year, including dividends. That’s about double the S&P 500’s total return over that period.

After a run like that, are REITs still cheap enough to consider buying?

You bet they are.

As I wrote last week, mainstream U.S. stocks are very expensive at today’s prices, trading at a cyclically-adjusted price earnings ratio of 27. This is more expensive than they were in 1929 and 2007 — both before their respective meltdowns.

But looking at REIT dividend yields, we see a very different story. Apart from the brief spike in yields that happened during the 2008 meltdown — remember, falling prices mean rising yields — REIT dividend yields have barely budged over the past decade. Since 2006, they’ve essentially bounced around in a range of about 3.2% to 4.0%:

are REITS a good buy

As you can see, that’s a far cry from the 8% yields that were the norm for the 1970s, ‘80s and even parts of the ‘90s. But remember, we’re in a very different world today, one in which bond yields scrape along at lows that few ever believed possible.

In 1980, CPI inflation was 13.9% and the 10-year Treasury yielded over 12%. That made the 8% dividends offered by REITs look terrible by comparison.

Today, REITs as an asset class may yield only 3.4%, but that looks pretty good in a world where CPI inflation and the 10-year Treasury yield are both below 2%.

If you believe — as we do — that this period of low inflation and low bond yields still has a few years left to run, then REIT dividends at today’s levels look like a very solid value. In fact, three of our eleven current long-only positions in the Boom & Bust portfolio are invested in REITs.

Ultimately, we expect prices in the REIT sector to go much higher. In a world in which near-zero yields seems to be the new normal, REITs seem like a fine place to park some of your cash.

Image Charles Signature

Charles

The World’s “Safest” Investment is About to CRASH

The one investment you may hold dear to your heart… the one investment that helps you sleep better at night, that you rely on for safety, security, and maybe even profits in a world gone mad… is about to get slaughtered.

When it happens, trillions in wealth will be wiped out virtually overnight!

To find out exactly what this investment is, click here.

Click to Learn More
Categories: Investing

About Author

Charles Sizemore is a research analyst with Dent Research. His primary research focuses on income, retirement strategies and fundamentals.