I received many comments on my article regarding the exchange I have made between ConocoPhillips (COP) and the Vanguard REIT Index ETF (NYSEARCA:VNQ). There were comments regarding this trade which I highly appreciate. In the previous article I explained why I decided not to stay in COP though it seems to be attractive now. In this article I will try to explain:
- Why I didn't wait in cash.
- Why did I choose an ETF and not a stock like the Healthcare candidates Ventas Inc. (NYSE:VTR) or Omega Healthcare Investors, Inc. (NYSE:OHI).
- My strategy going forward with VNQ.
In hindsight I am always smart but pretty blind when it comes to the short term future. I cannot tell if a stock will go up or down in the coming trading week, day or hour and therefore I am trying to think more strategically with a the long term horizon in mind.
When I considered VNQ I had the next three graphs in my mind: the Dividend per Share, the Dividend Yield and Volatility.
The Dividend per Share
VNQ has increased its dividend an impressive 10% in average going from 2010 to 2015. The dividend is driven by the variety of 155 different U.S. REITs that VNQ holds across the multiple sub-sectors.
The Dividend Yield
The recent pullback allowed VNQ to reach the level of 4% dividend yield per year. When looking at the Dividend yield chart we can see that it actually was a bit higher during the August selloff, but again, I can't time the market to the optimized entry point and 4% is good enough for me.
The ability to hold multiple REITs and pay low management fees, which is only 0.12% per year, allows investors to overcome situations like the Healthcare selloff that took place earlier this week.
The next chart is showing the behavior of VNQ in the recent month compared to my other Healthcare holdings, OHI, VTR and HCP, Inc. (HCP). I prefer to lower the volatility in my portfolio, hence VNQ is the best candidate among these four.
I expect the volatility in the markets to continue. I have alluded to the reasoning behind this many times in the past. Among other things we have high uncertainty regarding the FED's actions this year, the strength of the dollar which impacts commodities and Global corporations, the fear of a worldwide economic slowdown and the geopolitical concerns around the globe.
As U.S. corporations would be impacted and I expect that REITs would not behave differently and their business will be impacted as well. I therefore defined that my VNQ buying-point would be lower than $75.
The next sensitivity table illustrates the VNQ yield at different price levels and in three different dividend per share scenarios:
- The dividend goes down by 10%
- The dividend remains flat
- The dividend goes up by 5%
I will wait to see how the dividend is shaping up this year. In either case, towards the end of March I expect high swings due to the interest hike decision. It could drive the ETF to the levels of the Q4'14 pull back of $60-65. This would be the next time to add and achieve a higher dividend yield.
With the current level of uncertainties I cannot see a scenario where the markets go back to all-times-highs, therefore I prefer to be paid while I'm waiting for a less volatile environment.
Taking a first position in VNQ allows me to be exposed to a high yielding investment vehicle that has a relatively lower volatility due to the built in diversity, especially compared to specific stocks (which I already hold).
I encourage you not to get into bitterness and remorse feelings in the current tough environment. Those who are patient will win at the end of the day. See any crisis as an opportunity.
Disclosure: I am/we are long VNQ, OHI, VTR, HCP.
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.