REITs (Real Estate Investment Trusts) have been popular with investors because they are thought of primarily as yield stocks. More than a decade ago, double digit yields were available on REITs that invest in properties. Investors bid up stocks and yields fell into single digits. In today's low yield environment, there are still REITs with attractive yields.
The Dow Jones Equity Index (DJR) had a run since 2000 through the start of 2007. DJR sank during the recession and then recovered, reaching 315 at the end of May. Since then it dropped 50, along with other yields securities, on concerns about the Federal Reserve cutting reducing its bond buying program. The yield on the 10 year Treasury rose 115 basis points to 2.75% in the last 3 months.
Dividends in recent years have become more important for raising investment value and income. About 40% of appreciation from the S&P 500 came from dividends since 1929. Capital appreciation has been limited in recent years. The S&P 500 has grown a meager 13% since December 31, 1999. Dividends have become a larger part of investment gains in recent years.
Attractive yields still are available on REITs. Many of the biggest REITs invest in traditional properties such as apartments, stores and malls. Other properties are not as well understood, enabling smarter investors to earn higher yields. And generally only a part of dividends are taxed as ordinary income. The table below shows four high yielding REITs investing in "other properties." Their dividends are more than in 2007 (prior to the recession).
Senior Housing Properties (SNH)
Omega Healthcare (OHI)
EPR Inc (EPR)
HCP Inc (HCP)
(1) Senior Housing Properties owns 392 properties located in 40 states and Washington, DC, valued at $5.2 billion. The portfolio includes: 260 senior living communities with 31,100 living units and 2 rehabilitation hospitals; 120 properties leased to medical providers, medical related businesses, clinics and biotech laboratory tenants; and 10 wellness centers. SNH has raised annual dividends since 2001
(2) Omega Healthcare Investors owns 477 skilled nursing facilities, assisted living facilities and other specialty hospitals located in 33 states and operated by 47 third-party healthcare operating companies. OHI has raised annual dividends since 2003.
(3) EPR Properties invests in entertainment and related properties. Properties with over 200 tenants include 103 megaplex movie theaters and 87 other properties including entertainment retail centers, recreational and specialty properties. After a dividend cut in 2009, it has bounced back and in April 2013 EPR started paying dividends monthly.
(4) HCP, Inc. invests in real estate serving the healthcare industry. There are more than 1,000 properties in 5 sectors: senior housing, post-acute/skilled nursing, life science, medical office and hospital. HCP is in the S&P 500 index and a Dividend Aristocrat (the dividend has increased for 28 consecutive years).
EPR illustrates how REIT benefits from high yields and capital appreciation. I purchased shares about 15 years ago, attracted by a double digit yield. Since then the dividend has doubled, my shares have almost tripled (helped with reinvested dividends) and market value is up about eleven fold. More importantly, my income is 6½ times the original income.
EPR began by investing in multiplex theaters (16 or more screens). The company diversified by adding multiplex screen theaters at other theater chains. Then it invested in other non-traditional investments such as recreational properties, ski parks, waterparks, golf complexes and charter schools. Last year $121 million was invested in theaters out of a total $298 million. The remainder was invested in education and entertainment properties.
Appreciation for EPR has been outstanding. To replicate that record, dividends need to keep growing and investors will have to bid up the stock so that they are willing to accept a 3% yield. But moderate growth still brings handsome rewards. Dividend income can substitute for capital appreciation which will help investors achieve target rates of return. Reinvesting dividends add to investment worth.
The other 3 stocks offer similar investment opportunities. Because senior housing and health facilities are not well understood, these stocks provide higher yields for savvy investors. In addition to high yields, stocks for these companies have done well over the last decade. The best performing stock was OHI which was just a few dollars 10 years ago. SNH, EPR and HCP have doubled.
The recent market sell-off has hit high yield sectors very hard, and they have been leading the way lower for 3 months. The increase in Treasury interest rates has raised rates on mortgages. Higher mortgage rates will negatively impact borrowing rates for REITs and interest cost is typically the largest expense for REITs.
Prior to 2008, the yield on the 10-year Treasury bond was over 4% and REIT stocks rose. REITs with long-term assets have been through good and bad economic times. They survived and grew. With higher current income, REIT investments are best for investors with a long-term vision because a stream of dividends raises portfolio values over time. Investors earn current income the same way as in the past by selecting companies with attractive yields and growing dividends. Capital appreciation follows which adds to portfolio values.
Interest rates are rising and that can bring an end to the stock market rally. But the best investments are made when security prices are low. REITs have long-term assets that bring a growing income over time. For those less concerned with timing, present high yields will feel good whatever happens in the stock market.