The Hershey Company: A Sweet Investment [View article]
Moatfrog: I often ask myself that same question when reading SA articles. I think this author gave us a much better answer than most. In the article he suggested we buy on pullbacks so logically that would apply to his own potential purchase; and he also says he can't own everything he writes about and lists his 10 or 15 holdings (seems to love credit card companies). What is missing for me is the obvious question--why is he writing the article in the first place? Is he just a nice guy trying to educate his fellow investors? Many SA writers are trying to sell us something--they want to manage our money, sell us newsletters, graphs or books. This author has a new book listed in his profile but if he is trying to sell it I would say it is a very soft sell. I think what SA needs, in addition to a disclosure section is a conflict of interest section where the author tells us what he is trying to sell--if anything, and if he is just a nice guy he can tell us that.
Bard: Reading both of your articles I am at a loss as to why you focus so much on the spread from the 10 year Treasuries. In a normal or even semi-normal environment (maybe 1988-1998) I can see where that information could be of value. But assuming that the 10 year Treasuries have been artificially manipulated for the last four/five years by the FED tells me that other income investments aren't a good investment because the spread is less. It just means that the 10 years are a terrible investment and the other options are a little less of a terrible investment (of course I will have to admit that I would have said the same thing three years ago and been wrong). Maybe in your next article you should talk about why you think the spread is meaningful in this environment.
Joe X: My point is that a lot of REITs have a dividend that is higher, sometimes much higher, than that required by tax law (assume 100% of taxable income). So they do have the excess cash flow and I would prefer they use it as you suggest-to meet their capital expenditure needs (that can be maintenance of existing buildings or purchase of new). Many choose not to and I'm not sure how many REIT investors know this. If the writers of REIT articles would include a simple table for any REITs they recommend showing the dividend, versus FFO, versus taxable income it would soon become clear (I think).
Everybody wants real estate. KKR is prepping its first-ever fund dedicated to real estate and reportedly has an initial $500M commitment. "We've got a real sense of urgency around scaling in these businesses and grabbing as much land as we can." TPG Capital is planning the launch of at least a $1B fund - it would be the largest initial property fund since Lehman's 2001 $1.6B launch. That didn't work out so well, but first there was several years of partying. [View news story]
Let me understand this--it's OK for Equity Residential to own apartment complexes for the working stiffs but single family homes should be off limits? With logic like that it's no wonder we have the politicians you scorn.
Adam: You make the point that "unlike a dividend stock which can utilize a portion of cash flow" REITS don't have that luxury. I think you are wrong by a wide margin. All that REITs need to distribute in dividends is taxable income. In most cases they have plenty of cash flow beyond that (primarily related to depreciation that reduces taxable income). This excess cash they can either distribute as a dividend or retain to expand (buy more real estate). Some REITs play the game of distributing far more than they need to. Long term this reduces earnings. If buyers of REITs understand this game that's fine and they can calculate that into their purchase.
Why REIT Dividends Are Not A Mirage [View article]
David: Your question didn't offend me (well, maybe just a little) and reading back on my answer I don't see any sarcasm--other than perhaps the small play on the fish or cut bait cliche. But what does surprise me is that after all the back and forth you still want to focus on Campus Crest and why I bought the stock and not the point I made. And I had the same reaction from SA's chief REIT expert when I used the same example on one of his articles. No one seems to want to say something like "Bruce, I don't have any problem with Campus Crest distributing a large dividend in it's third year, even if it is all return of capital--there's a good business reason for the action and here it is....". Or maybe something like "almost all REITs play that game in order to keep their investors happy--even if it makes no business sense" . Or as an author you could even say something like "I don't know the rationale for REITs distributing so much more than they need to but maybe one of our readers can help us". I don't expect SA authors to know everything about the area they are writing about but I always hope for a direct response. And the very worst response, to me, is when the author starts talking about the article being a starting point and the reader has to do their own "due diligence"--which says to me "don't count on me to make your job easy".
Why REIT Dividends Are Not A Mirage [View article]
David: I do own Campus Crest (and it has done well for me so far) although I'm not sure what that has to do with the issue I raised. I used it as an example only because it is an extreme example with 97% of it's dividend from return of capital for 2012. My point is pretty basic--some REITs are distributing cash flow that I think could be better used internally to grow earnings. And that information is not widely known or understood by many of the readers of SA. Because many of the authors on SA either don't understand the issue themselves, or choose to ignore it, I think those of us who comment should identify issues like that and try to encourage the authors to respond. As a long term investor I want my REITs to maximize long term earnings by limiting dividends to the minimum required by law. That's especially true of a small, new REIT like Campus Crest that has much room to grow. Other investors just want the cash--I understand that. Some investors don't really care where the cash is coming from. Many don't understand the issue at all and seem locked into the belief that REITs distribute only what is required by law (read the comments in your latest article and that might become obvious). Now Campus Crest is a stock that has minimum investment info available. It is not followed by S&P. It is not followed by Value Line and many of the other investment services. Therefore we (or at least I) am looking for SA sources that will provide that information. We have some REIT experts on SA. If the authors have a conflict of interest that keeps them from identifying the negatives of a stock, I want to understand that quickly and stop reading that author. I would assume most other investors would feel the same way. I will admit that back in August when I bought the stock I didn't realize that 97% of their dividend was return of capital. I think the stock went public in 2010 so there wasn't much of a history to research. That info is only made available once a year by the REITs. If I had known that I would have totally discounted the dividend as a reason to buy the stock. Might still have bought it for other reasons (good Zack analyst ratings, good corporate governance rating). So I'm not sure what is out of whack with that. You're fishing, I'm cutting bait but we're not catching many fish.
3 Reasons To Boost Short-Term Allocation [View article]
Not sure about your statement that short term bond funds have "offered no clear benefits". I moved my brokerage cash from MMF to Vanguards Short Term Investment Grade fund (VFSTX) a few years ago. Last year it had a total return of 4.52%, with a duration of only 2.4 years. Of course that might not compare favorably to longer term bond funds but I consider it a cash equivalent investment that shouldn't be compared to the much riskier bond fund. So the obvious benefit to me was a decent return with little risk.
Why REIT Dividends Are Not A Mirage [View article]
CorvetteKid: I probably didn't make my point clear. Taxable income is the MINIMUM level that a REIT has to distribute each year but most of them choose to distribute more than that, some of them distribute far more than the taxable income amount. I used Campus Crest as an example--If I am understanding their annual tax message (each REIT has to provide that and this is the time of year when they arrive) Campus Crest stated that 97% of their dividend was return of capital and only 3% was taxable income. They could have held that 97% and used it to purchase/build additional student housing so the obvious question is why would a fairly new, small REIT do that? As an owner of the REIT I want them to reinvest those funds and down the road that will lead to a larger "real" dividend and stock appreciation as the earnings grow. Their dividend is largely a mirage. Without that optional dividend their dividend rate would fall from approximately 5% to almost nothing. I think they are trying to attract investors, whereas their competitor (American Campus) which has been around much longer has a dividend of only 2.9% (even that is higher than taxable income requires). I think some DGIs buy the Campus because of the higher dividend without even knowing that it is a mirage.
Why REIT Dividends Are Not A Mirage [View article]
David Fish: I think you are right about #2--just like with a mutual fund, realized capital gains have to be distributed to shareholders and the tax paid by the shareholders but I think you are wrong about #3 resulting from "property disposals". I think REITS can (and do) return capital for any reason they choose--it might be property disposal but is more likely just distributing cash flow as a way to boost the stock price.
Why REIT Dividends Are Not A Mirage [View article]
SDS; REITS were once double taxed also. Then in 1960 the real estate industry convinced Congress/Eisenhower that the baby boom generation needed more real estate--apartments, shopping centers, etc. and preferential tax treatment was the best way to get it. How much longer before Congress wakes up (probably not until the housing market completely heals)--now we have timber REITS and Iron Mountain is converting. Is there any logic to the dual system? What is really surprising is that some DGIs think they are getting a good deal with that 15% qualified dividend tax--totally ignoring the corporate tax as if it doesn't affect them. They think of the highest taxed investment as the best deal (only 15%!). When the double REIT tax arrives they will understand what the impact of a double tax is, as REIT dividends dramatically drop and REITs ask to convert back to normal double taxed corporations.
Why REIT Dividends Are Not A Mirage [View article]
As you say REITS are required to distribute 90% of their taxable income and to avoid taxes must distribute 100% of that taxable income (and I think they all do that). What seems to be missing from your article is an acknowledgment that many REITs have dividends that exceed their taxable income--in some cases far exceed taxable income (see Campus Crest). The distribution that is in excess of taxable income is totally optional on the part of the REIT. Yes, they have the cash flow to make the excess distributions but is it the wise thing to do? That optional distribution reduces the funds that are available to the REIT to buy more properties. REITS can grow, without issuing shares or borrowing, if they retain those funds. They can grow faster if they retain those funds plus issue more shares. The mirage might be those investors who don't realize (or care) that some REITs are playing this game. If an investor thinks he can reinvest those excess dividends better than the REIT then it seems to me he shouldn't own that REIT.
Monday Market Movement: Buffett Tells It Like It Is [View article]
Diver: In his annual reports he discusses "intrinsic value" versus book value. He says intrinsic value is just a very rough estimate of what the future holds, and every analyst would arrive at a different number so it can't be used. Book value, he says, is not all that useful for Berkshire but he has to use something. He says it is fine for the stocks he owns (e.g., Coke) because the market determines the value every day but how do you value GEICO where there is no market? I quote from the 2005 annual report "many of the businesses we control are worth much more than their carrying value". So that is why he will buy back his stock at 120% of book--he knows it understates the true value of Berkshire.
Monday Market Movement: Buffett Tells It Like It Is [View article]
Buffett spent a lot of words telling us why Berkshire doesn't issue dividends (and they make sense to me) but he doesn't really tell us why he wants dividends from the companies he holds. He does say he LIKES receiving dividends but LOVES share buybacks at the right price. Why does he want IBM to issue a dividend? Can't IBM find better uses for the money, just like Buffett can? So it seems to me that he is saying none of the companies, he holds shares in, can use the money as well as he can (even after the double taxation on the dividends). I guess that is why his first preference is to buy the whole company and eliminate the need for a dividend.
REITs: Why The Dividends Are A Mirage [View article]
When I saw the title of your article I assumed you would talk about those REITs that distribute far more in dividends than required by the IRS (think Campus Crest). REITs are required to distribute 90% (really 100% to avoid corporate tax) of TAXABLE income, not cash flow. When they dip into non-taxable income to fund dividends (largely a result of depreciation which isn't taxable income) then to me they are artificially boosting dividends to attract investors or to fatten up the value of management stock options (if there is another motive for the action I have never seen it explained). In those cases your article makes sense--if REITs then turn around and raise more money to offset the return of capital it does the investor no good. .
The Hershey Company: A Sweet Investment [View article]
Fixed Income: Fewer Places To Hide [View article]
Just How Risky Are REITs? [View article]
Everybody wants real estate. KKR is prepping its first-ever fund dedicated to real estate and reportedly has an initial $500M commitment. "We've got a real sense of urgency around scaling in these businesses and grabbing as much land as we can." TPG Capital is planning the launch of at least a $1B fund - it would be the largest initial property fund since Lehman's 2001 $1.6B launch. That didn't work out so well, but first there was several years of partying. [View news story]
Just How Risky Are REITs? [View article]
Why REIT Dividends Are Not A Mirage [View article]
Why REIT Dividends Are Not A Mirage [View article]
3 Reasons To Boost Short-Term Allocation [View article]
Why REIT Dividends Are Not A Mirage [View article]
Why REIT Dividends Are Not A Mirage [View article]
Why REIT Dividends Are Not A Mirage [View article]
Why REIT Dividends Are Not A Mirage [View article]
Monday Market Movement: Buffett Tells It Like It Is [View article]
Monday Market Movement: Buffett Tells It Like It Is [View article]
REITs: Why The Dividends Are A Mirage [View article]