Don't Chase Yield; Buy These Blue-Chip REITs Instead

Summary

• You’ll simply be far better off avoiding these “pie in the sky” yields that eventually end up sacrificing capital in the process.
• These high yielding REITs are often referred to as yield traps, meaning they have terrible fundamentals, including deteriorating business models and cash flows, and weak balance sheets.
• We insist on owning blue-chip REITs over high-yielding value traps.
• This idea was discussed in more depth with members of my private investing community, Rhino Real Estate Advisors. Get started today »

As a financial writer and real estate investor for over three decades, I can attest to the temptation for yield chasing. Over the years, I have learned some tough lessons of investing, and as a writer I’m constantly encouraging readers to avoid the fool’s game with regard to “sucker yield” REITs.

You’ll simply be far better off avoiding these “pie in the sky” yields that eventually end up sacrificing capital in the process. Just because high dividends appear superior, it doesn’t necessarily mean the highest yield is the best. There’s a point in which being a high yield dividend landlord can be hazardous.

As readers know, I write frequently on the “sucker yield” stocks that have a dividend payout ratio greater than 100%, that means they’re paying out more than their earnings as dividends. If their earnings don’t recover promptly, dividends can become unsustainable because the company will be unable to reinvest, reducing its capacity to grow in the future.

Also, if the company is highly leveraged, and is having trouble meeting its liabilities, it’s going to be a big red flag for the dividend.

Simply put, we constantly warn readers about avoiding dividend traps as we seek to identify the highest quality companies with a sustainable competitive advantage and a robust operating model. A high-yielding stock with poor fundamentals is often forced to cut its dividend and investors get hit with a double whammy.

Not only do they lose the income they desired, they also get handed a sizeable capital loss - since a stock’s price often plunges following a dividend cut.Our first and foremost objective for investing is to always seek to protect principal at ALL costs.

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3 Dividend Traps

This “reaching for yield” is just asking for trouble. These high yielding REITs are often referred to as yield

Analyst’s Disclosure:I am/we are long frt, skt, uba. 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.