With the slow but steady growth of our economy we are discovering money moving back into traditional growth and value stocks and the interest in high-yield dividend stocks is waning rapidly. This brings a question to my mind: Is it time for investors to move away from REITs? Companies like Annaly Capital Management (NLY) have been lowering dividends over the last year. Let's take a look at what the markets are doing presently and then answer the question whether or not investors should gravitate away from REITs.
Money is Cycling Away from Dividend Yields
For well over two years now investors have searched for the best yields they could find and a lot of this has driven the stock market up. The lower interest rates (thank you Fed) have created attractive buys for slow growth sectors that had big dividend yields like utilities and telecoms. Investors gravitated toward the sectors because they offered better returns than any government debt could at the time.
The prosperity the sectors enjoyed for so long could be coming to an end soon as the US Treasury bond climbed to 13 month highs. The combination of a healthy (but slow) economic recovery plus the Feds possibly pulling back the bond buying program are causing investors to look toward treasuries and move away from the big dividend paying companies.
The S&P 500 (SPX) revealed a 2.4% dividend yield when investors gravitated more toward higher yields. But yields weren't high enough. Look at what investors were moving into:
Consumer Staples: 2.7%
But the S&P 500 continues to go up. In May it rose nearly 3.6% before the end of the month while utilities dropped 9.2%, telecoms fell 5.2% and staples barely budged at 0.2%. There have been a lot of individual and fund managers who have been focused on these defensive groups for so long the valuations in these defensive sectors have grown pretty high. Side-by-side with companies that don't pay dividends, the stocks look pretty expensive right now
Are REIT's Still a Good Investment?
REITs have been some of the greatest performers of the last three years. Low interest rates have helped companies deliver outstanding returns. Companies like American Agency Capital Corp. (AGNC) have brought returns of up to 24%. Should investors still focus on mortgage REITs?
Obviously interest rates would be a factor to be able to answer this question. Even though I have heard rumors of tapering off from the Fed, I would like to bring attention to the Fed "threshold number." Bernanke has reiterated numerous times that until unemployment numbers hits 6.5% the feds are going to be raising interest rates. Even though we have had slight economic recovery, unemployment is still at 7.6% and we haven't had "significant" economic improvement. So as of today it doesn't look like interest rates are going to be going up a whole bunch soon.
From this little bit that we do know I don't see the Fed raising the interest rate very soon and for this reason REITs like AGNC and NLY may still be a good investment.
The "zero interest rate policy" for the Fed has done wonders for REITs. They borrow short-term to invest in these residential mortgages and the Feds policy has allowed them to borrow at near zero rates and reap profits for investors of the companies. I don't see this changing soon, and with the housing market picking up like it does it may also help REITs.
Even though investors are moving away from companies that give high yield dividends and looking at value and growth stocks I believe this won't have an impact on REITs yet. They are in a class by themselves because they are driven by the dividend. The low interest rate policy of the Fed is not going to go away quickly and even though interest rates for these companies like NLY and AGNC have gone down, they are still much higher than other companies and will continue to yield higher dividends. Income investors will always exist and these companies still offer a good buy for the investment.
If you would like to do your own research, I would also recommend looking at two other REIT stocks:
Hatteras Financial Corp. (HTS)
A medium cap firm with market capitalization of $2.5 billion
Its return on equity is 12%
Total revenue of $506
The annualized dividend has a current yield of 10.87%
Chimera Investment Corporation (CIM)
Current yield is 11.25%
Market capitalization of $3.25 billion
Posted net income of $137 million
Ytd growth of 21.5%
It started the year with a closing price of $2.60 per share. It ballooned to $3.16 per share on May 24. This makes it quite attractive in terms of share growth and dividend yield.