The Fed keeps rates at 1.5% – 1.75%. Where should income investors look for quality yield?
As was widely expected, the Fed held rates steady at yesterday’s final policy meeting of 2019.
This comes after cutting rates at the three prior meetings, which has lowered them to the current target range of 1.50% – 1.75%.
The Fed signaled it’s in no rush to begin hiking rates any time soon. As to why, the official policy statement was largely upbeat on the economy, noting our current economic expansion, strong hiring conditions, and stable prices.
In another sign of bullishness, the statement dropped the phrase from October referencing “uncertainties about this outlook remain.”
Also, new projections show that most Fed officials believe rates don’t need to be lowered further. This means if economic conditions hold, it’s likely rates will stay steady through 2020.
Perhaps the best sum-up of the Fed’s current mindset comes from Fed Chairman Jerome Powell in a speech from late last month:
Monetary policy is now well positioned. If the outlook changes materially, policy will change as well.
So, until we see real changes in the underlying economy, markets know what to expect, which is a good thing.
***While low, steady rates might be helpful in promoting an economic expansion, they’re not helping income investors
Below is a chart showing average CD rates from 1984 through today.
Though the X-axis isn’t labeled, all you have to do is look at the declining slope of the line to see the pain that income-investors have felt for years.
In short, whereas the average 1-year CD paid over 10% in 1984, today, it will pay you a whopping 0.82%.
But this doesn’t mean that you have to stretch for yield by putting your money into riskier assets.
Our own Neil George specializes in finding high yields from quality investments in his newsletter, Profitable Investing. And just last week, he profiled an investment that’s offering solid income, a cheap valuation, and the potential for a price pop as this company may become an acquisition target.
What are the details?
Let’s dig in.
***There are always opportunities for outsized income and growth over time with REITs
That statement comes from Neil.
For any readers who are less familiar, REITs (real estate investment trusts) are businesses that own income-producing real estate in all sorts of real estate sectors — think single family homes … apartments … offices … or health care related properties.
You know how ETFs allow investors to own big groups of stocks with just one click in a brokerage account? You can think of REITs like ETFs for properties.
To be considered a REIT by the government, a company must pay out at least 90% of its taxable income to its shareholders. This means that REITs can be a great source of cash-flow for investors like you and me.
Now, there’s a corner of the REIT sector that Neil is eyeing today. And there’s a specific reason why he likes it.
The real assets of land and buildings provide a base of asset security, and leases provide cash to pay dividends. … the real key to getting reliable income and safer growth is to be in a captive market with controls on supply and strong demand.
When it comes to a captive market for real estate, few locations are more restricted in supply than college and university student housing.
This is why student housing attracts so much heavy money from hedge funds and private equity.
So, what is it about student housing that’s attractive to both Neil and private equity investors?
Think about it — every single year you have a new crop of students attending universities. This provides a highly reliable revenue stream that other REITs don’t always enjoy.
Here’s how Neil puts it:
… college dorm properties continue to rise in investment demand around the globe, as returns on capital and returns on operations are increasingly deemed to be more reliable than for other real estate or REITs in commercial, retail or other residential properties, which can be buffeted by ups and downs of local and broader economies.
***What’s the best way to play campus housing?
Neil has found the last pure publicly listed U.S. collegiate property REIT: American Campus Communities (ACC).
He tells us that since becoming public in 2004, ACC as returned 432.83% to date, for an average annual equivalent return of 11.53% per year.
Neil also points to positive stats, including its 97.5% occupancy rate, the prestigious schools at which it operates properties (including Princeton, Temple, and Drexel), and its diversified portfolio of 206 properties spanning 25 states.
But ACC’s financial situation is where it gets even more exciting. From Neil:
Revenues are steady and rising, with gains over the trailing year of 10.6%. And ACC runs itself with efficiency, as its general and administrative costs run at just 5.2% of net operating income. Funds from operations are running at 11%.
Shares are cheap relative to the rest of the US REIT market, as tracked by the Bloomberg US REIT Index, with ACC valued at 1.98 times its book value compared to the index average of 2.96 times.
The dividend is also a tick better at 3.92% compared to the index average of 3.77%.
As mentioned earlier, Neil isn’t the only analyst who likes ACC. At the end of the third quarter, at least 19 hedge funds were invested with ACC.
***What about ACC’s buyout potential?
Neil explains that, last year, one of his former Profitable Investing holdings, Education Realty Trust, was acquired by Greystar Real Estate Partners and Blackstone Real Estate Income Trust.
That deal resulted in a nice double-digit return for his model portfolio.
Then, last month, two UK-based student housing companies — Unite Group (UTGPF) and Living Liberty Group — merged in a $1.8 billion deal.
Finally, last week, reports came that Brookfield Asset Management (BAM) and Blackstone Group (BX) are discussing bids for the private company, iQ Student Accommodation.
I would imagine that ACC may well become a potential target for another acquisition given the ongoing developments in this segment.
***If you’re looking for quality income investments beyond ACC, Neil has plenty more ideas for you
This past September, Neil released a book that tackles this issue head-on. It’s called Income for Life: 65 Income Streams ANYONE Can Collect.
The book includes 65 different income plays. There are investment ideas, as well as unique “side hustle” opportunities.
Here’s Neil on the investment opportunities in the book:
There are many securities which I outline that offer yields that are multiples greater than that of the S&P 500 and the general U.S. bond market — all with minimal risk from proven companies’ stocks, bonds, preferred shares ETFs, closed-end funds, and other funds.
All of these are buy-and-own — with no need to trade anything or deal with options strategies. And yes, I have plenty of yields running from 7%, 8%, 9% and over 10% — all vetted and proven in their capability to deliver income for any individual investor.
But as just mentioned, the book also includes non-market-related income ideas. Back to Neil:
And it also provides numerous means to generate additional income outside the markets. There are countless ways to generate income beyond regular paychecks. And I present a wide variety of ideas and the steps needed to make them pay and pay well — all while doing many things that folks are interested in already.
To learn more about Income for Life: 65 Income Streams ANYONE Can Collect, click here.
Back to ACC, if you’re interested in adding it to your portfolio, Neil suggests you purchase it in a taxable account in order to take advantage of the 20% deduction on dividend income for Federal income taxes under the Tax Cuts & Jobs Act of 2017.
We’ll continue bringing you high-quality income investments from Neil here in the Digest.
Have a good evening,