- Interest rates have fallen so far this year. This has confounded most pundits' predictions.
- High-yield sectors and stocks outperformed in the first quarter driven to a large part to this interest rate decline.
- Given my outlook for the year, this outperformance could easily continue. Below are two attractive high-yield plays that were in the news this week.
Monday will be the last trading day of the first quarter of 2014. So far the year has not worked out the way most pundits have predicted. Interest rates have fallen from the 3% level they began the year at for 10 year treasury bonds. The market is pretty much where equities started the year; albeit with increasing volatility.
High yield stocks and sectors like real estate investment trusts (REITs) have generally been strong performers in 2014. This reverses some of their underperformance in 2013. I think this continues for most if not all the rest of the year. I don't see interest rates spiking as it is hard to see the 3% GDP growth some economists predicted at the beginning of the year with the current anemic job growth and with the Federal Reserve slowly reducing their liquidity support measures.
I will continue to be over allocated to the REIT sector until conditions change on the ground. Here are two attractive REITs I hold that had positive news this week.
Independence Realty Trust (NYSEMKT:IRT) is a real estate investment trust that seeks to own well-located apartment properties in geographic submarkets that it believes support strong occupancy and the potential for growth in rental rates.
Deutsche Bank initiated the shares as a "Buy" this week with a price target of $10 a share as the bank sees the REIT providing an overall return over 20% including dividends at its current price level. In February, Independence posted FFO (Funds from Operations) of 20 cents a share, 3 cents a share above consensus.
The REIT pays over an 8% annual dividend with monthly dividend payouts. For some reason, sites like Yahoo! Finance show no dividend yield which might be a good reason it is not showing up on income investors' radars using filters. Revenues will more than double this year on acquisitions and analysts have another 40% sales gain penciled in for FY2015.
American Realty Capital Properties (NASDAQ:ARCP) is a real estate investment trust (REIT). The company owns and operates mainly single-tenant retail properties, and the company has a presence in almost all 50 states. It is the largest publicly traded "net lease" REIT in the world.
It was reported this week that the REIT's chairman and CEO Nicholas Schorsch bought 50,000 shares of ARCP at just under $14 a share. This brings his total stake to 3.6mm shares. The shares paid an over seven percent (7.2%) yield and just moved to monthly dividend payouts.
One of the main reasons an income investor wants to own American Realty is that its recent acquisition of Cole Real Estate (NYSE:COLE) made it the largest player in its space. However, ARCP is priced at a ~20% discount using forward FFO to its two largest competitors, Realty Income (NYSE:O) and National Retail Properties (NYSE:NNN). American Realty also pays a much higher yield than either and should be able to narrow the valuation discount as it benefits from economies of scale from the COLE purchase.