The Godiva REITs: The Naked Truth

by: Brad Thomas

To be honest, I love chocolate as much as I love REITs. I was shopping with my wife and kids this weekend and as I was getting ready to swipe my credit card, I glimpsed over at the Godiva chocolate display. Immediately I began to crave the taste for mouth-watering solid milk chocolate, so I reached over and grabbed a bar.

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It was a weak moment but I'll concede that chocolate is one of the few temptations that I can't resist, especially Godiva. The gold-wrapped bar weighing 1.5 ounces is one of the most gratifying experiences on the planet and there is simply no other ingredient that can seduce my palate. Biting into a premium brand like Godiva is a gratifying experience and the most rewarding part of the love affair is to relish the delicious premium brand known for its Belgium heritage dating back to 1926.

Of course, Godiva was a beauty before being a chocolate. Most of you know that Lady Godiva lived in the 11th Century and she was famous for riding naked through the streets of Coventry in England. One version of the Godiva legend includes Peeping Tom, who was struck blind when he violated the mystery of Godiva's beauty and was punished for viewing the "naked truth".

The legend of Godiva has evolved into a classic figure identified as a stunningly beautiful woman and the candy has become a brand recognized for superior quality. So what does this have to do with REITs?

The Naked Truth About REITs

According to NAREIT, "Transparency is an important element in the REIT story and can be thought of in two ways. (1) REITs provide tax transparency, meaning that the REIT pays no corporate tax in exchange for paying out strong, consistent dividends. Rather, taxes are paid only at the individual shareholder level. (2) In addition, REITs provide operating transparency, meaning that listed REITs are registered and regulated by the Securities and Exchange Commission and adhere to high standards of corporate governance, financial reporting and information disclosure. They are also covered by a robust group of Wall Street and independent analysts."

The U.S. REIT industry's corporate governance has been recognized by RiskMetrics Group as among the best in the stock market. In recent years, RiskMetrics Group ranked the REIT industry in the top tier among all industries in the quality of its corporate governance. In an era when too many companies have been exposed for poor business practices, good governance wins investors' attention. (source: NAREIT)

REITs are Something Special

Warren Buffett has said:

Your premium brand had better be delivering something special, or it's not going to get the business.

It's no secret, I think REITs are something special and I get the same feeling when I bite into my favorite Godiva chocolate. It's not just the transparency that I'm attracted to but the dividends.

REITs and REIT investors thrive because the income producing business model serves as a disciplined income strategy whereby dividend policies (for REITs) are reliable and predictable. Remember that by law, REITs must pay out at least 90 percent of taxable income and, on average, REITs pay out around two-thirds of their total return in the form of dividends. The other one-third is capital appreciation. So clearly dividends are not paid out as a reward (like most companies) but instead they "anchor" the total return composition and that is why they are so enticing.

Accordingly, REITs provide investors with a powerfully unique income strategy in which the dividend-anchored total returns are also the essence of the repeatable value proposition. Unlike most other fixed-income alternatives, REITs perform a highly valuable task by turning the sources of (rental) income into powerfully consistent and reliable dividends.

Unlike Lady Godiva, REITs are not myths either. It's the attraction to repeatability - the strongest sources of differentiation - that makes REITs one of the most sustainable income alternatives on the planet.

Now that we've peeled off the REIT wrapper, let me list a few of my favorite "blue chip" REITs. Sink your teeth into these dividends and remember that by re-investing the dividends (or compounding) you are also getting a "free share" machine and that means that you can "super size" your portfolio for the long-haul and that, my friends, is how I sleep well at night!

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Source: SNL Financial and NAREIT


Note: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circumstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.

Disclosure: I am long O. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.