Torn dollar with REIT (Real Estate Investment Trust) paper message
GettyHere’s a quick quiz for you: an imperative multiple-choice, single-question test that you can refuse to take. Though it might be to your detriment.
If it’s any consolation, there’s no immediate penalty for answering wrong. It’s only if you forget the correct answer later on that you’re in for some trouble.
So are you in? Great.
Phones down. Pencils ready. And… go.
Q: What kind of investment is the absolute best one you can possibly hold in your personal or professional portfolio? Is it:
- Bonds
- ETFs
- Stocks
- Anything that will give you the highest return over the longest period of time.
Easy, right? On paper, anyway. In practice, it can be an absolute headache, a nightmare, or a path right into long-term issues with insomnia.
If bonds, ETFs, stocks and other kinds of investments came with “money plus expected profits” back guarantees… that would make the game a whole lot more simplistic.
Can you imagine the confidence you could display in putting your portfolio together under that kind of assurance? What a wonderful world that would be.
No doubt, you’re feeling a little less weighed down at just the thought.
Diversify as Much as Possible
Maybe that’s how heaven works, but – as we all know – it’s not the reality we have to deal with down below. That’s why we always need to diversify our investments as much as possible, buying into:
- Different sectors
- Different companies
- Different capitalization sizes
- Different regions.
That way, we won’t get wiped out if a single company, sector, cap size or region gets hit hard. We’ll take our losses, overall resting easy in the knowledge though that we’ll no doubt rebound in little time at all.
That’s not baseless optimism talking. It’s pure, historically documented fact.
Now, one very important part of the sector configuration above are real estate investment trusts, or REITs. I know that anyone who regularly reads me knows that’s where I was going. Then again, anyone who regularly reads me knows why that is.
For one thing, REITs are dividend stocks. They’re legally required to pay out at least 90% of their taxable income to their shareholders – which means they have a tendency to offer higher payouts than other conservative stocks.
Because of that and other legalities they have to adhere to, these assets are overall really quite safe. I’m not saying you don’t have to do your due diligence before you buy them. Hardly.
However, the majority of them are solid, stable investable entities.
And if “solid” and “stable” sound boring or even detrimental to you… if you need a final reason why REITs belong in your portfolio…
How about this: They’re proven to boost your returns over time as compared to portfolios that don’t take this advice.
These Stocks Want to Say, “High!”
Now that we’ve got that all that established, let’s discuss those dividend yields specifically.
Most regular dividend stocks offer something in the 7.5%-9.7% range. If that sounds less than sizable, I get it. But when you’re holding enough shares in one of those companies, it does add up. I promise.
Plus, when you reinvest those dividends back into the stock over time – even when you own less of it – the results can be very rewarding.
Don’t knock it ‘til you try it.
As I said above, you want a healthy mix in your portfolio. So don’t go filling up on REITs only after you read this next bit of advice. But REITs can be even more rewarding in this regard.
They usually come complete with yields of 7.5%-9.7%. And again, over time and when handled wisely, that difference can mean a world of wealth.
Now, there are some real estate investment trusts out there with unsustainable payout ratios. So just because you see a high one doesn’t mean it’s a good one.
In fact, I’m normally very leery about investing in anything outside of the normal range. I’ve been burned once before in that regard, and I don’t believe in being burned again if at all possible.
That’s why I’m very careful to make sure that each REIT I research knows what it’s doing. It has to not only have the cash on hand to keep its promises to shareholders. It also has to have enough left over to invest in internal growth.
Otherwise, you have a sucker yield on your hands. And those never end well for anyone involved.
Fortunately, the REITs I’m about to mention look like they can hold their own… even with yields of 7.5%, 8.2%, 8.9%, and 9.7%.
Let’s give them a closer look.
These REITs Readily Yield to You
Plymouth Industrial (PLYM) is a small cap that focuses on industrial and warehouse space in both primary and secondary markets. The company’s total portfolio consists of 57 industrial buildings with approximately 12.6 million square feet spread across 10 states. Its key markets include Chicago, Jacksonville, Cincinnati, Memphis, Indianapolis, and Columbus.
Analysts forecast Plymouth to grow FFO by 17% in 2020, which means there’s a very good chance it will increase its dividend from $1.50. Since its IPO (June 2017), Plymouth has increased access to new institutional sources of capital in order to finance acquisitions.
Plymouth shares are priced at $18.22 with a dividend yield of 8.23%. Given the growth forecasted, we expect the company could deliver returns in the high double-digits annualized.
KKR Real Estate Finance Trust (KREF) is a commercial mortgage REIT that was established in October 2014 with an initial capital commitment from Kohlberg, Kravis Roberts & Co.’s (KKR) balance sheet of $400 million. Since then, KREF has continued to execute on its primary investment strategy of originating floating-rate senior transitional loans.
KREF targets senior secured loans from $50 million to $400 million with capital allocations spread over the top 30 U.S. markets. The company has focused origination efforts on the multifamily and office property types because of their short-term, light transitional business plans.
I consider KREF’s 8.9% dividend yield especially appealing. KREF believes it has “created a defensively positioned portfolio” and the company “will continue to target the highest-quality opportunities, trading incremental yield for credit quality”.
Tanger Outlets (SKT) is a pure play outlet center REIT that owns ZERO department stores. Although the company leases its outlet space to traditional in-line mall retailers – like Nike, Victoria’s Secrets, and Ann Taylor – it has no “big box” department store exposure.
Another difference worth comparing is the fact that Tanger has a best-in-class payout ratio (of around 60%) which means that there is a wide margin of safety between the company’s free cash flow and dividends paid.
Impressively Tanger has maintained strong occupancy (around 96%) through multiple economic cycles, and a rock-solid balance sheet (rated BBB by S&P). The current yield is 9.7%, that strikes me as a deep value stock that iw worth further research.
Finally, I am fixated on Iron Mountain (IRM), the document storage company that is transforming into a trusted storage business for most everything – from artwork, to legal documents, to shredding, to digitization, to cloud storage.
Iron Mountain stands as the industry leader in storage and information management services, serving 230,000 customers in 50+ countries on five continents. One of the biggest reasons I like this REIT is because of the opportunity for the company to scale operations by upselling its customers into digitization and data storage.
Iron Mountain has expanded its data center footprint globally via Fortrust, I/O, Credit Suisse, and EvoSwitch acquisitions - that segment accounts for 6% of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). The company is now targeting 10% by the end of 2020.
Iron Mountain is now yielding 7.5% and we consider this an attractive metric. Given the 7% growth (in AFFO) we have forecasted in 2020, we consider Iron Mountain a solid buy.
I own shares in SKT, KREF, IRM, and PLYM.
