Why Not REITs?
Since the fall of 2011, this series of reports has used dog dividend methodology to uncover possible buy opportunities in each of nine major market sectors listed by Yahoo Finance. This article responded to reader suggestions for a dividend dog analysis of the Real Estate Investment Trust industry within the financials (Fins) sector.
This report was written to reveal bargain stocks to buy and hold one full year. See Dow 30 article for an explanation of the term "dogs" for stocks reported based on Michael B. O'Higgins' book "Beating The Dow" (HarperCollins, 1991), now named Dogs of the Dow. O'Higgins' system works to find bargains in any collection of dividend paying stocks.
Dog Metrics Sorted REITs by Yield
Top REIT dogs from each of ten categories were winnowed out of 200 from here to make a weighted list of 40 that showed the biggest dividend yields as of March 16. The 10 types of REITS (by yield) and their percentage weight were: mortgage and finance (23%); residential (12%); retail (13%); office (7%); mixed industrial & office (4%); diversified (13%); health (6%); specialty (8%); lodging (9%); and industrial (5%).
Actionable Conclusions: (1) Mortgage/Finance, Specialty, Residential, and Diversified REITs Show Highest Yields; (2) Lodging, Office, and Industrial REITs Show Lowest Yields of Ten Categories
Top REIT category stock by yield was the mortgage/finance leader, Western Asset Mortgage Capital (NYSE:WMC) . In second place, CorEnergy Infrastructure Trust (NYSE:CORR) , represented Specialty REITs.
In third pace, ARMOUR Residential REIT (NYSE:ARR)  represented residential REITs. Fourth from the top was Wheeler REIT (NASDAQ:WHLR) , leader of retail REITs. In fifth was Anworth Mortgage Asset Corporation (NYSE:ANH), tops of the Diversified contingent. In sixth place, New Senior Investment Group (NYSE:SNR)  represented health care REITS.
In seventh place was the industrial REITs leader, Communications Sales & Leasing, Inc. (NASDAQ:CSAL) . The top office REIT representative, placed eighth, Government Properties (NYSE:GOV) . Mixed Industrial/Office REITs, captured the ninth place, led by Select Income REIT (NYSE:SIR) . Finally, Ashford Hospitality (NYSE:AHT) , the lodging REIT representative, placed tenth to complete the top March 16 REIT dog category list by yield.
REIT March Dividend vs. Price Results Compared To The Dow Dogs
Graphs below showed relative strengths of the top ten REIT category dogs by yield as of market close 3/16/2016 with those of the Dow index. Annual dividend history from $10,000 invested as $1k in each of the ten highest yielding stocks, along with the total single share price of those ten stocks, made the data points shown in green for price and blue for dividend.
Actionable Conclusion: (3) REIT Leaders Charged Into March
The REIT collection of top dividend payers by category turned bullish which was a rare turn last seen in October. Dividends fell as prices rose. Aggregate single share price of the 10 REITs increased 15% after February and total dividend from $10k invested as $1k in each of the top ten REITs fell earthward at a rate of 13%. Thus, the REITs charged and finally narrowed, a window of investment opportunity (and risk) that had steadily opened over the past year.
Actionable Conclusion (4) Dow Dogs Joined The Charge
Dow dogs dropped in dividend and their aggregate share price inclined after Procter & Gamble (NYSE:PG) replaced Intel (NASDAQ:INTC) in the top ten as of 3/16. Projected annual dividend from $10k invested as $1k in each of the top 10 fell 5.8%. At the same time, aggregate single share price increased 15% to mount the bullish charge.
The Dow dogs' overbought condition (in which aggregate single share price of the ten exceeded projected annual dividend from $1k invested in each of the ten) increased.
[I invite you to sign on to my premium site, The Dividend Dog Catcher, to share my discussion about how the Dow (short of tossing out IBM (NYSE:IBM)) could, in one move, return to a normal balance where dividends from 10 $1k investments can again exceed the aggregate single share price of those top ten stocks.]
Actionable Conclusion (5): Dow Dogs Remain Overbought
The overhang was $291 or 79% for April; widened to $320 or 90% to begin May; and soared to the new record $406 or 112% in June.
The Dow bubble deflated as DuPont (NYSE:DD) replaced IBM in the tenth slot of the top ten for July to peg the gap at $269 or 71%, then inflated again as IBM replaced Pfizer (NYSE:PFE) to widen the gap to $331 or 85% for August. September brought some sanity back to the runaway Dow when the gap stood at $279 or 67%. October increases in price by Chevron (NYSE:CVX) and Exxon Mobil (NYSE:XOM) pushed the gap to $334 or 85%.
November changed out McDonald's (NYSE:MCD) for Wal-Mart (NYSE:WMT), and GE (NYSE:GE) for Coca-Cola (NYSE:KO). The resulting price over dividend gap went to $303 or 78%. As of December 4, the gap stood at $294 or 75%. Come January 12, prices of the ten Dow top dogs fell, and dividends rose, as Boeing (NYSE:BA) replaced General Electric to reduce the overbought gap to $215 or 53%. February moves put the gap at $230 or 55% February 16. March hyped the move to $370 or 94%.
This gap between high share price and low dividend per $1k invested defines the Dow overbought condition. Meaning these are low risk and low opportunity Dow dog stocks. The Dow top ten average price per dollar of annual dividend is $25.85.
Conversely, the REIT dog chart shows them to be much higher risk and higher yield. Furthermore, analysts see the REITs as far better price gain potential pups compared to those of the Dow this month. The REIT top ten by category average price per dollar of annual dividend was $7.22.
Meanwhile, the REIT top ten by yield averaged a price per dollar of annual dividend of $5.71.
Actionable Conclusions (6) 10 Top REIT Dogs Chase 30.13% to 141.23% March 16, 2017 Upsides (7) 2 Pose Downside Risk of 12% & 14%
Charts above used one-year median target price set by brokerage analysts multiplied by the number of shares in a $1k investment to compare ten Real Estate Investment Trust (REIT) stocks showing the highest upside price potential into 2017 out of 30 selected by yield. The number of analysts providing price estimates was noted after the name for each stock. Three to nine analysts have proved more accurate for valid mean target price estimates.
Thirty For the Show
Actionable Conclusions: Wall St. Wizards Estimated (8) 24.56% Average Upside And (9) 30.15% Average Net Gain from Top 30 REIT Dogs
Top thirty REIT dogs were graphed below to show relative strengths by dividend and price as of March 16, 2016 along with dividend and price calculated from analyst mean price target estimates to the same date in 2017.
A hypothetical $1,000 investment in each equity was divided by the current share price to find the number of shares purchased. The shares number was then multiplied by projected annual per share dividends to find the projected dividend return. Thereafter, the analyst mean target price was used to gauge the stock price upsides and net gains including dividends less broker fees as of 2017.
Historical prices and actual dividends paid from $1,000 invested in the highest yielding stocks and the aggregate single share prices of those thirty stocks divided by 3 created data points for 2016. Projections based on estimated increases in dividend amounts from $1,000 invested in the thirty highest yielding stocks and aggregate one-year analyst target share prices from Yahoo Finance divided by 3 created the 2017 data points, green for price and blue for dividends.
Analysts polled by Thomson First Call as reported in Yahoo Finance projected a 12% lower dividend from $10k invested as $1k in each of the average stocks in this group, while aggregate single share price was predicted to rise nearly 16% in the coming year. The number of analysts contributing to the mean target price estimate for each stock was noted in the next to the last column on the charts. Three to nine analysts have been known to provide more accurate estimates.
A beta (risk) ranking for each rated stock was provided in the beta column on the right side of the above chart. A beta of 1 meant the stock's price would move with the market. Less than 1 showed lower than market movement. Higher than 1 showed greater than market movement. A negative beta number indicated the degree of a stocks movement opposed to market direction.
Actionable Conclusion (10): Analysts Estimated 10 Top REIT Dogs Would Net 34.89% to 262.45% By March 16, 2017
Five of the top yielding REIT dividend dogs were verified as being among the top ten gainers for the coming year based on analyst 1-year target prices. So this month the dog strategy was 50% accurate.
Ten probable profit generating trades were revealed by Thomson First Call analysts for 2017 per their target prices reported by Yahoo Finance:
Gramercy Property Trust (NYSE:GPT) was projected to net $2,624.47 based on dividends plus a median target price estimate from eight analysts less broker fees. The Beta number showed this estimate subject to volatility 25% opposite the market as a whole.
Wheeler REIT was projected to net $861.94, based on dividends plus a median target price estimate from three analysts less broker fees. The Beta number showed this estimate subject to volatility 24% more than the market as a whole.
Northstar Realty Finance (NYSE:NRF) was projected to net $671.46 based on the lowest estimate from one of five analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 8% more than the market as a whole.
CorEnergy was projected to net $603.38 based on dividends plus the median of annual price estimates from three analysts less broker fees. The Beta number showed this estimate subject to volatility 46% more than the market as a whole.
New Senior Investment Group was projected to net $473.62 based on a median target price estimate from three analysts combined with projected annual dividend less broker fees. The Beta number showed this estimate subject to volatility 43% less than the market as a whole.
Independence Realty Trust (NYSEMKT:IRT) was projected to net $448.28 based on dividends plus a median target price estimate from five analysts less broker fees. TA Beta number was not available for IRT.
Communications Sales & Leasing, Inc. was projected to net $444.74 based on dividends plus median target price estimate from seven analysts less broker fees. A Beta number was not available for CSAL.
New Residential Investment (NYSE:NRZ) was projected to net $431.72 based on estimates from eleven analysts plus dividends less broker fees. The Beta number showed this estimate subject to volatility 28% more than the market as a whole.
New York Mortgage Trust (NASDAQ:NYMT) was projected to net $418.75 based on dividends plus median target price estimate from seven analysts less broker fees. The Beta number showed this estimate subject to volatility 15% more than the market as a whole.
The GEO Group, Inc. (NYSE:GEO) was projected to net $348.89 based on dividend plus a median target price estimate from four analysts less broker fees. The Beta number showed this estimate subject to volatility 7% less than the market as a whole.
Average net gain in dividend and price was 74.37% on $10k invested as $1k in each of these ten dogs. This gain estimate was subject to average volatility 7% less than the market as a whole.
Actionable Conclusion (11): (Bear Alerts) Analysts Predicted Two REIT Dogs To Show Net Losses of 3.6% and 6.89% By March, 2017
Two probable losing trades revealed by Thomson First Call in Yahoo Finance in 2017 were:
Government Properties was projected to lose $36.37 based on dividend and a median target price estimate from four analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 31% less than the market as a whole.
Select Income REIT was projected to lose $68.91 based on dividend and a median target price estimate from three analysts including $20 of broker fees. The Beta number showed this estimate subject to volatility 33% less than the market as a whole.
Average net loss in dividend and price was 5.26% on $2k invested as $1k in each of these two REIT dogs. This loss estimate was subject to average volatility 32% less than the market as a whole.
Dog Metrics Extracted Bargains
Ten leading REIT equities, as noted above, were culled from here. Yield (dividend/price) methodology was applied to select the top three high yield stocks from each of ten categories:  mortgage and finance,  residential,  retail,  health,  office,  specialty,  mixed industrial & office,  diversified,  lodging, and  industrial. One top dividend paying stock from each of those ten categories constituted the leading REITs. Listed as of market close, March 16, the category leaders ranked themselves by yield as follows:
Actionable Conclusions: Analysts Allege (12) 5 Lowest Priced of Top Ten Highest Yield Category Leading REITs Deliver 35.16% Vs. (13) 39.05% Net Gains from All Ten As Of March 16, 2017
$5,000 invested as $1k in each of the five lowest priced stocks in the top ten REIT kennel by category were predicted by analyst 1-year targets to deliver 21.04% more net gain than $5,000 invested as $500 in each of all ten. The very lowest priced REIT dog, Wheeler REIT, was projected to deliver the greatest net gain of 86.19%.
Lowest priced five REIT dogs as of March 16 were: Wheeler REIT (NASDAQ:WHLR); Anworth Mortgage Asset Corporation; Ashford Hospitality Trust; New Senior Investment Group Inc; and Western Asset Mortgage Capital (NYSE:WMC), with prices ranging from $1.44 to $10.12.
The higher priced five REIT dogs for March 16 were: CorEnergy; Government Properties; ARMOUR Residential REIT; Select Income REIT; and Communications Sales & Leasing, Inc., whose prices ranged from $15.40 to $22.12.
Dog Metrics Extracted Bargains For Top Yield REITs
Top yielding dividend paying stocks from those ten categories constituted the top yield REITs list. Listed as of market close, March 16, the top yielders ranked themselves as follows:
Actionable Conclusions: Analysts Allege (14) 5 Lowest Priced of Top Ten Highest Yield REITs Deliver 43.08% Vs. (15) 42.62% Net Gains from All Ten As Of March 16, 2017
$5,000 invested as $1k in each of the five lowest priced stocks in the top yield REIT kennel were predicted by analyst 1-year targets to deliver just 1.08% more net gain than $5,000 invested as $500 in each of all ten. The very lowest priced REIT dog, Wheeler REIT, was again projected to deliver the greatest net gain of 86.19%.
Lowest priced five top yield REIT dogs as of March 16 were: Wheeler REIT; Newcastle Investment Corp. (NYSE:NCT); New York Mortgage Trust; Anworth Mortgage Asset Corporation; and Orchid Island Capital (NYSE:ORC), with prices ranging from $1.44 to $10.02.
The higher priced five high yield REIT dogs for March 16 were: Western Asset Mortgage Capital; New Residential Investment Corp.; Northstar Realty Finance; CorEnergy; and ARMOUR Residential REIT, whose prices ranged from $10.12 to $20.39.
This distinction between five low priced dividend dogs and the general field of ten reflects the "basic method" Michael B. O'Higgins employed for beating the Dow. It also works well for teasing bargains out of the list of top yielding REIT category leaders, or the top REITs by yield as you see.
The added scale of projected gains based on analyst targets contributed a unique element of "market sentiment" gauging upside potential. It provided a here and now equivalent of waiting a year to find out what might happen in the market. It's also the work analysts got paid big bucks to do.
A caution is advised, however, as analysts are historically 20% to 80% accurate on the direction of change and about 0% to 20% accurate on the degree of the change.
The net gain estimates above did not factor-in any foreign or domestic tax problems resulting from distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.
See my instablog for specific instructions about how to best use the dividend dog data featured in this article.--Fredrik Arnold
The stocks listed above were suggested only as reference points for a REIT dog stock in late-March, 2016. These were not recommendations.
Gains/declines as reported do not factor-in any tax problems resulting from dividend, profit, or return of capital distributions. Consult your tax advisor regarding the source and consequences of "dividends" from any investment.
Disclaimer: This article is for informational and educational purposes only and should not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security. Prices and returns on equities in this article except as noted are listed without consideration of fees, commissions, taxes, penalties, or interest payable due to purchasing, holding, or selling same.
Disclosure: I am/we are long ARR, CSCO, PFE, VZ.
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.