Introducing The Reliable Income REIT Portfolio

Includes: BPR, PEI, SRC
by: Mark Roussin

I am launching this new model portfolio, which will consist entirely of REITs.

The goal behind the portfolio is to invest in high-quality REITs offering high-yield and reliable income streams that investors can depend on during any economic backdrop.

The portfolio is launching today with 3 stocks: Spirit Realty Capital, Pennsylvania REIT, and Brookfield Property REIT.

Introducing The Reliable Income REIT Portfolio

I am excited to launch this new REIT portfolio for you to follow along with me. As many of you know, I am a big proponent of dividend stocks, particularly Real Estate Investment Trusts or REITs. Investing in REITs is a way to invest in Real Estate and can provide dividend investors with higher yields and attractive income streams for the long-term.

The purpose of this portfolio is to invest in quality companies that provide high-yield dividends that are reliable. There are not too many worse situations than a dividend investor seeing one of their investments cut a dividend they are relying on, especially those in retirement. Thus, a well-built REIT portfolio can be trusted to provide you a safe income stream even when times are tough.

As such, in order to help those looking for high-yield REITs in their portfolio, I have built a portfolio for those conservative investors to follow. Before we get into the first three stocks we have added to the portfolio, let’s go over our blueprint for the portfolio and give you a little more insight into why REITs deserve a spot in your portfolio.

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Portfolio Blueprint

The Reliable Income REIT Portfolio takes a different approach than our normal core dividend portfolio. The core dividend portfolio invests in more dividend growth names taking on more risk than you will see be taken within this portfolio. Let’s take a look at how our Reliable Income REIT portfolio will be constructed:

  • High-quality companies paying reliable dividends
  • Invest only in REITs
  • Target portfolio yield of 6+%

Here are the rules we will be sticking by for this portfolio:

  • I will start by making a $2,000 initial investment in each stock as it joins the portfolio.
  • Additional investments of $1,000 will be made if any initial investments remain a compelling buy.
  • Dividends will be collected until we collect $1,000 before making another investment
  • Only sell if the thesis breaks (dividend becomes unsafe, negative changes take place within the company, or strategy changes for the company).

Why Invest In REITs?

Investing in real estate is a tried and true method of successful investing that created many of today’s richest people in the world. In fact, a study done by Forbes in 2018 listed Real Estate as the industry having the third most billionaires in the world, at 220, or 10%.

What attracts people to real estate is the fact that the industry is usually a predictable business thanks in part to rental income, which makes this kind of investment highly attractive to long-term investors.

REITs tend to payer higher dividends than non-REIT stocks in part to their tax structure. REITs are required to pay out 90% of their otherwise taxable income to investors in the form of dividends in order to keep their REIT status. This structure forces REIT management teams to make the most of their capital as they do not have the luxury of investing back into their company through income as much as non-REITs do, but they gain tax advantages through their REIT status.

Being that real estate is vital to both people and businesses, the demand for properties is always there, regardless of economic conditions.

REITs can be a solid defensive play for investors in the event the economy begins to slow as well, which has been a hot topic of discussion of late. In a recession, REITs have the ability to decrease rents for tenants who may be struggling in order to keep properties filled. In return, income streams tend to remain relatively resilient and consistent over the full cycle.

A Look AT The Reliable Income REIT Portfolio

We started off our portfolio on a few opportunistic buys we have been following for some time now. Spirit Realty Capital (SRC) is a name we have been covering a lot lately (see latest article here). SRC has a similar portfolio of tenants as Realty Income (O), while trading at a significant discount to Big O. Brookfield Property REIT (BPR) is a mall REIT that was formed in the buyout of GGP. Mall REITs have been under intense pressure, but mall REITs with class A nd B malls have been performing well, and that is exactly what BPR is. The company owns an attractive portfolio that continues to trade at a discount to others. Lastly, Pennsylvania REIT (PEI) or PREIT as many refer to it as, is a stock that is down 35% over the course of the last 12 months. PREIT is one of the first equity REITs in the US. PEI invests in retail shopping malls located in the eastern half of the US, primarily in the Mid-Atlantic region. As you may notice, we invested in PEI’s preferred shares over their common shares as we felt this was the best path for us at this time. The preferred shares currently pay a 9% yield and trade 17% below par. We are monitoring the common shares of PEI, but would not purchase them for this portfolio due to risk, as such, the preferred shares offer more reliability for our Reliable Income REIT portfolio. We will provide more on these names soon.

The portfolio currently sports a dividend yield of 7.11% and a yield on cost of 7.72%. It is our goal to keep the portfolio above 6% as we stated above. Early on we are focused on opportunistic names, but as the portfolio grows we will be more mindful of diversification, considering these initial investments are heavy mall REIT focus. We believe those with quality properties will survive the space, it's the class C mall operators and below that will struggle in this day in age.

Investor Takeaway

Based on current economic conditions and a pending recession estimated to arrive in the next 12-18 months, we are preparing ourselves and you earlier rather than later. We want to put a sizable amount of our portfolio in a group of safe and reliable dividend paying REITs, which should be able to perform in any economic backdrop. Investing in high-yield, and high-quality names is a main focus of ours.

Anytime I make a change to the portfolio, I will update my followers precisely. Otherwise, I will post monthly updates moving forward.

Disclosure: I am/we are long SRC, BPR, PEI.PC. 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.