January’s market rally is starting to fizzle out, with trade war and worries of global slowdown threatening to disrupt stock gains. With volatility likely to return to the bourses, investors will seek out defensive options, which offer higher income levels at slightly higher risk than bonds, whose attractiveness is set to decline.
Real estate investment trusts (REITs) fit the bill easily with their consistent, high income streams. They offer a simple way for individual investors to park their money in commercial real estate.
Further, they are legally mandated to distribute the majority of their income as dividends. Investing in REITs offering substantially high dividends looks prudent.
Strong Choice for Income Investors
REITs are possibly the first and most convenient option for investors looking for regular income. Firstly, they legally pay out 90% of their income as dividends to investors. In reality, most of them distribute nearly all of their taxable income.
Further, compared to traditional stocks, REITs offer twice the amount of payouts. This is what leads to their reputation as steady income creators. And unlike their fixed income counterparts, they can raise their dividend payouts year after year.
REITs Set to Outperform in 2019
As we enter 2019, equity markets are facing a number of headwinds. Trade tensions with China and tighter monetary policy from the world’s central banks are combining to put the brakes on global growth. At the same time, the domestic economy remains strong enough to stave off a recession.
REITs would make for great additions to your portfolio under such circumstances because of their steady income streams. Per the National Association of Real Estate Investment Trusts’, (Nareit) Calvin Schnure, REITs are exhibiting sturdy gains in funds from operations (FFOs) and healthy occupancy rates.
REITs to Benefit From Rate Hike Pause
One major disadvantage of REITs is that they are a rate-sensitive class of securities. It comes as no surprise that they have flourished during a low environment. And the latest signals from the Fed indicate that this could continue for an extended period given that signs are strong that the economy is slowing.
At the end of its last policy meeting, the Fed refrained from raising rates and hinted that further rate hikes could be put on hold. The central bank’s balance sheet reductions could also end sooner than previously expected. Even the normally hawkish Fed Chair said the “case for raising rates has weakened somewhat.”
Incidentally, even as rates are set to remain low in the medium term, REITs as a class have been steadily reducing their exposure to possible rate hikes, according to Schnure.
Further, strong economic growth can fuel gains for REITs even in a rising rate environment, as demonstrated by Nareit data. This is because strong economic conditions boost the industry’s earnings and share prices.
As we progress further into 2019, U.S. equity markets are facing a number of headwinds. But while the pace of growth is likely to fall off, a full-blown recession seems unlikely. REITs are an ideal class of stocks to generate steady income levels under such conditions.
This is why it makes good sense to add them to your portfolios. However, picking winning stocks may be difficult.
This is where our VGM Score comes in. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three scores. Such a score allows you to eliminate the negative aspects of stocks and select winners. However, it is important to keep in mind that each Style Score will carry a different weight while arriving at a VGM Score.
We have narrowed down our search to the following stocks based on a good Zacks Rank and VGM Score.
Ready Capital Corporation RC is a publicly traded mortgage REIT which finances real estate operations.
Ready Capital carries a Zacks Rank #1 (Strong Buy) and has a VGM Score of A. The Zacks Consensus Estimate for the current year has improved by 1.1% over the last 30 days. The stock has a dividend yield of 10.1%.
Sotherly Hotels Inc. SOHO is a lodging REIT which is self-administered and self-managed.
Sotherly Hotels has a VGM Score of A. The company’s expected earnings growth for the current year is 9.7%. The stock has a dividend yield of 7.2%. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Bluerock Residential Growth REIT, Inc. BRG is a REIT which acquires apartment properties in demographically attractive growth markets throughout the United States.
Bluerock Residential has a Zacks Rank #2 (Buy) and VGM Score of A. The company has expected earnings growth of 10.7% for the current year. The stock has a dividend yield of 6.4%.
City Office REIT, Inc. CIO is a REIT which focuses on acquiring, owning, and operating office properties in the United States.
City Office REIT carries a Zacks Rank #2 and has a VGM Score of B. The company’s expected earnings growth for the current year is 12.8%. The stock has a dividend yield of 8%.
Exantas Capital Corp. XAN is a REIT which provides commercial real estate loans and credit investments such as commercial mortgage-backed securities.
Exantas Capital carries a Zacks Rank #2 and has a VGM Score of B. The company’s expected earnings growth for the current year is 45.7%. The stock has a dividend yield of 6.5%.
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Bluerock Residential Growth REIT, Inc. (BRG) : Free Stock Analysis Report
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