- There are plenty of millionaire-making tactics out there worth following.
- That’s why there’s a whole entire book about it: The Millionaire Next Door.
- It’s one of my favorite books of all times – even though, when I read it the first time, I didn’t take it to heart the way I should have.
- Lesson learned since then though.
- Looking for a helping hand in the market? Members of iREIT on Alpha get exclusive ideas and guidance to navigate any climate. Learn More »
When was the last time I did a piece about The Millionaire Next Door?
“… there are three things we’re probably looking at for the next four years: additional regulations for companies, inflation, [and] the growing possibility of a market bubble bursting.
“I won’t be melodramatic and call those factors wealth killers. But separately – much less all put together – they’re most definitely wealth stealers. And the less you know about them, the more they’re apt to take from your bottom line.
“Most mainstream investors, you see, are far too focused on the obvious side of making money. If their stock prices go up, they’re happy. If their stock prices (go) down, they’re not.
“It’s as simple as that in their minds.
“But there are so many factors that can and do make major differences in how much of those ups you keep.”
The advice that followed was to buy and hold investments that:
- Were already at least working at toeing the environment, societal, and governance - ESG - line
- Could more than keep up with inflation, probably through dividend payouts
- Weren’t trading in a bubble.
While there’s no guarantee those guidelines will make you a millionaire if you follow them faithfully…
Your chances of reaching that mark are exponentially higher than if you ignore them.
The “Tragic” Truth About Hollywood Wealth
There are plenty of millionaire-making tactics out there worth following. That’s why there’s a whole entire book about it: The Millionaire Next Door.
It’s one of my favorite books of all times – even though, when I read it the first time, I didn’t take it to heart the way I should have. Lesson learned since then though.
Believe you me.
For those of you who didn’t read the book or don’t know about it, I described it on Dec. 1, 2020. That was in “Learn to Invest Like the Millionaire Next Door,” which read like this:
“… I was blown away by (Thomas) Stanley and (William) Danko’s findings… namely that most millionaires don’t own Ferraris or live in yachts. On the contrary, they live by principles like discipline, hard work, and thrift.
“According to Stanley and Danko, millionaires are more likely to be your next-door neighbors. They live in their same starter home with their 15-year-old (or more) used Volvo as their main source of transportation.”
I’ve covered a number of their money-making, money-saving tips and tactics since then. But for today’s post, I want to focus on how boring most millionaires really are.
To prove this – and to show how you can fit right in with them – I’m going to turn to a Business Insider writeup from last year. Featured on MSN News just about a year ago now, the headline was: “There Are Only 6 Billionaires in Hollywood. Here’s How These Celebrities Became So Much Richer Than Their Peers.”
That first part might shock you. How in the world can there only be six people who fit into the combined category of red-carpet entertainers who make more than mere millions?
If you read the aforementioned book, you wouldn’t be surprised.
Diversification Makes Dollars Out of Dimes
Hollywood stars may make millions every single year, with some making tens of millions.
Problem is, they don’t do much to maintain that money. They’re too busy keeping up with the Joneses, noting who’s who with what’s what.
It’s one giant world of one-upping each other by way of the latest style of home décor, the fastest car, the most stylish clothes… It’s all very one dimensional. Which means they’re not in the business of diversifying.
As the aforementioned Business Insider article notes, “What sets these six billionaire entertainers and studio executives apart from their peers is not only that they excelled in the industry but that they leveraged their success to make investments that provide significant income beyond their salaries.”
It does admittedly note that, “Hollywood’s billionaires’ club may not stay small for long, however, as more and more stars launch their own clothing and beauty lines. Three celebrities – Kyle Jenner, Jay-Z, and Kanye West – become billionaires in the past two years alone.”
So some of them are apparently getting a clue in this regard. But even then, it’s taken them long enough.
Investing in one’s immediate look is all well and good. In fact, there’s a lot of money to be made in promoting pretty faces and “perfect” bodies during the best of times. But that shouldn’t be your only investment.
Not even close.
It should only be a very small fraction. Because when the bad times come – and they always eventually do – people shy away from the luxuries and stick with necessities instead.
Holding onto a spread of those necessities like the real estate investment trusts (REITs) below can keep the stress lines off your face, while helping you become the millionaire you hope to retire as, next door or otherwise.
2 Millionaire Money-Maker REIT Picks
I just finished up an interview with Omega Healthcare Investors (OHI) CEO Taylor Picket (for iREIT on Alpha members) and he pointed out that the skilled nursing landlord has been able to continue to grow the portfolio by utilizing attractive cost of capital (6.3% implied cap rate).
In Q1-21 the company added $595 in assets to the portfolio, consisting of 24 senior housing properties ($511 million and 8.4% cap rate), previously owned by Healthpeak (PEAK) and six skilled nursing properties ($83 million and 9.25% cap rate).
This proves a point that having a “size advantage” is critical to generating shareholder value. There aren’t too many REITs that can “plop down” a-half-a-billion to snatch up a big senior housing portfolio. Back up the napkin, 9.3% cap rate – 6.3% implied cap rate = 300 basis points in profits.
Over the years, we have continued to add exposure to OHI, recognizing that the company has successfully engineered an enviable dividend-paying machine. The company has paid and increased dividend for 17 years in a row – through Great Recessions and Global Pandemics.
We recently purchased more shares in OHI for the Durable Income Portfolio, our income-oriented basket of REITs that has returned an average of 27.8% annually since 2013. Many REITs in our coverage spectrum are soundly valued however, OHI remains attractive today based on its yield (7.2%) and improved payout ratio.
Source: FAST Graphs
Speaking of “scale advantage,” we recently upgraded shares in Realty Income (O) from a hold to a buy, based on the new target “buy below” price of $70.00. I will be interviewing the CEO this afternoon (for iREIT on Alpha members) and I look forward to discuss the previously announced Vereit (VER) merger with him.
In a recent article I explained that Realty Income is a textbook example of my favorite REIT that continues to create value by using its “cost advantage” and “scale advantage.”
Using our weighted average cost of capital (“WACC”) approach we determined that Realty Income’s WACC is around 3.9% which in turn is the reason why the “merger is expected to be over 10% accretive to Realty Income’s AFFO per share in year one.”
Similar to Omega Healthcare Investors (and the PEAK deal), Realty Income is one of the few REITs that’s able to merge into a $16 billion company (Vereit) and generate healthy investment spreads without sacrificing the balance sheet.
Realty Income’s increased size will allow the company to pursue even larger sale-leaseback transactions without compromising prudent client and industry diversification metrics.
Less obvious – with regard to OHI and O – is the fact that both companies continue to improve diversification, thus limiting exposure to one tenant or operator. When you look back at Realty Income’s tenant list – and the evolution over the last decade – you can see that there is much less concentration risk.
And speaking of evolution, Realty Income has become a fortress REIT, with one of the best balance sheets in the REIT sector (rated A3/A- by Moody’s/S&P) and best-in-class credit metrics (5.3x Net Debt/ Adjusted EBITDAre).
More defensive = Higher premium
As I said above, we recently moved up our “buy below” target to $70.00 which means that we can continue to add exposure to the position. Shares are now trading at 20.2x P/AFFO with a dividend yield of 4.1% (well-covered I might add).
Once again, Realty Income has an enviable history of dividend growth, and now an equally more impressive record of growing earnings during multiple recessions and now a global pandemic.
All things considered, we believe this REIT could generate more stable and predictable returns and while $70.00 is the “nibble number” a $65.00 price represents a “full throttle” allocation.
Shares are trading now at $69.11, and this translates into a forecasted 15% total return 12-month target. To be clear, there’s integration risk to consider and we will be watching the merger closely and are likely to move the target higher (22x) as the integration plays out.
Source: FAST Graphs
One of the reasons that Realty Income and Omega Healthcare Investors are “anchors” to our Durable Income Portfolio is because this strategy is focused on the combination of “quality” and “value.” As Benjamin Graham, The Intelligent Investor, explained.
“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
And he added,
“...you must thoroughly analyze a company, and the soundness of its underlying businesses, before you buy its stock; you must deliberately protect yourself against serious losses; you must aspire to “adequate,” not extraordinary, performance.”
That is the secret to getting rich in the stock market and the way to build massive wealth by owning shares in Real Estate Investment Trusts.
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This article was written by
Brad Thomas has over 30 years of real estate investing experience and has acquired, developed, or brokered over $1B in commercial real estate transactions. He has been featured in Barron's, Bloomberg, Fox Business, and many other media outlets. He's the author of four books, including the latest, REITs For Dummies.Brad, with his team of 10 analysts, runs the investing group iREIT® on Alpha, which covers REITs, BDCs, MLPs, Preferreds, and other income-oriented alternatives. The team of analysts has a combined 100+ years of experience and includes a former hedge fund manager, due diligence officer, portfolio manager, PhD, military veteran, and advisor to a former U.S. President. Learn more
Analyst’s Disclosure: I am/we are long O, OHI. 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.
Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.