Every time these interest rates move up, for whatever reason, these Reits, MLP's, etc. get hammered. This presents a serious headwind going forward as interest rates will really begin to move up next year. I really like the 8%+ yield but price appreciation could be tough to attain. What do others think?
As a long term investor, I like to remember that over the long term, the S&P has returned about 8% - 9% a year, and the majority of that is from dividends and re-invested dividends. Accordingly, I like to get about 9% dividends or higher [NRF is my lowest yield] with capital appreciation being gravy ... mostly I try not to lose money from price declines [I'm still up on my 30,000 shares of NRF even as of today]. Over the mid to long term, NRF will provide price appreciation as the dividend will continue to go up causing the PPS to increase. Over the short-run .... who knows.
Conventional wisdom, as you have stated, is that interest rates will "really begin to move up next year." This expectation has already been reflected in the 10yr note, and so further moves should be muted. Looking at what happened when the previous two QE's ended; 10yr rates actually dropped. That's likely to happen again.
Confusion in the markets concerning the end of QE3 is caused by relatively weak economic data showing the Fed's objectives have not been met, but there are strong indications from the Fed that it will taper starting in September. This contradiction becomes rational only if one believes that the Fed has begun to focus on the negative side of QE, and realizes that it must taper soon, else the Fed will become the repository of the majority of Agency RMBS and treasuries, and the primary source of support for S&P stock prices.
So I'm expecting some extreme volatility going into the next Fed statement, and a fall in the S&P when taper begins in September. Weakness in the S&P will affect all stocks, even REIT's, even if 10yr rates are stable. By the end of the year, the markets will have sorted out the winners and losers.
The best thing the Fed could do is to announce targets for 10yr rates during the taper. That would settle the markets and avoid most of the volatility. However, I believe the Fed has made a host of mistakes in addressing this fiscal crisis, and is not likely to do any better in the future.
."Looking at what happened when the previous two QE's ended; 10yr rates actually dropped. That's likely to happen again."....
true...I've heard experts say it's not so...but yeah, look at the past charts ...i.e. I suspect that every time they took away the punch bowl, people fretted that the economy would slip back into a recession, so rates dropped back (i.e. people run to bonds when recessions come...) Sooo, let's say that the FED announced tomorrow that there will be NO MORE QE of any kind - what happens? Oh, stocks drop 20-30%...fear that Uncle Sam took away all the free money...and yes, interest rates would drop as bond prices would rise ...I could bet the house on that...assuming they just went cold turkey on QE...Be my guest...Let's shake up the experts on CNBC, telling us the economy is getting better and better ...really?...Fine, then dump QE and SEE WHAT HAPPENS...This all reminds me of some kind of MINI-WEIMAR economic theory , care of Gentle Ben & Krugman...Germany's stock PRICES rose 8900% in 2 years, in a lousy economy...all on a sea of printed paper...That's how I view the last 5 years, under this FED action - just keeping asset PRICES propped up (Ponzi)...and fighting disinflation by pumping out Trillions...and good luck with the $60-100 Trillion in unfunded liabilities to be paid for - better get the printing presses warmed up...or go to the SOLYENT GREEN movie for tips.
Very good piece you wrote...about the only thing I'd disagree with would be for the FED to set 'targets' on the rates, as they taper...folly. I'd let the markets decide what rates should be. Targets almost sounds like price controls of the past - never work in the long term. (unless we have higher growth and more inflation, I don't think rates will rise all that much...and I look at Japan's low rates for decades...could all be about demographics and deleveraging....But we'll have to see how it plays out)
As for the poster who responded to you, saying the Fed's basically done a good job...well, yes and no. One can argue that they held things together as Congress / Prez have done almost nothing in addressing the fiscal side of things....but one can also argue that the FED provided cover for Congress / Prez, so that problems don't have to be addressed...I'm sorta in that latter camp.
ps...as for reits/utilities/preferred stocks dropping on somewhat higher rates, well, I'm strictly going for cash flow in retirement, with no plans on selling the preferreds.(NRF-C&D and a few others)...so, I don't pay attn. to the stock prices too much - but the dividends I reinvest now, do get higher yields....i.e. my balance will drop a bit (paper loss), but my CASH FLOWS rise....Just make sure you hold em' forever...or until called, in the case of preferreds.
I think the Fed has done a terrific job re the fiscal crisis. They have done so with no help at all from Congress, even though Dr. B has repeatedly asked for appropriate fiscal policies. I don't know why people don't like the job the Fed has done; maybe you could tell us what bothers you.