The REIT Choice for Income

Worried that you’ll run out of income in retirement? Maybe you’re not worried enough.

According to the Center for Retirement Research, 50% of American households are at risk of not having enough money to maintain their living standards in retirement.

Below, I’ll discuss what I consider to be the optimal retirement income solution: real estate investment trusts (REITs).

In his April 25 article, my colleague Scott Chan extolled the virtues of master limited partnerships (MLPs) as reliable income investments. Because it functions as a regulated investment company (RIC), an MLP pays no corporate income tax as long as it distributes at least 90% of its gross income to its unitholders. Most MLPs operate in the energy sector, which is heavily influenced by the price of oil.

A REIT is another type of RIC that also pays big dividends to shareholders. As its name implies, a REIT invests either in real estate properties or mortgages that are secured by those properties. The fact is, most wealth in the United States derives from real estate, which is one reason why this asset belongs in your portfolio.

The REIT formula is simple: raise money from shareholders, buy real estate property (or property loans) with that money, and then pay dividends back to shareholders after deducting operating costs.

Admittedly, the real estate business is not as sexy as the energy sector. However, REITs are less volatile than MLPs and have performed quite well lately. During the past year (3/31/2018 – 3/31/2019), the iShares Core U.S. REIT ETF (USRT) delivered a total return (share price appreciation plus dividends) of 22.5% compared to 11.8% for the SPDR S&P 500 ETF (SPY).

That degree of outperformance by REITs begs the question: Why has real estate performed so well during the past year while the U.S. economy has been slowing down? If a recession really were on the way, demand for the types of properties owned by most REITs would decline.

Location, Location, Location

Most REITs specialize in one or more of the following categories of real estate: retail, commercial/industrial, lodging, residential, health care, and infrastructure. Within each of those groupings, there are specialized subsectors such as data centers, self-storage, and timberland.

According to the National Association of Real Estate Investment Trusts (NAREIT), 187 REITs trade on the New York Stock Exchange. In total, those REITs have a combined value of $1.08 trillion. That’s slightly more than the $991 billion market cap of the world’s most valuable publicly traded company Microsoft (NSDQ: MSFT). The average annual yield on all those REITs is 4.1% compared to 1.8% for the SPY.

Some REITs pay far more than that. For example, AG Mortgage Investment Trust (NYSE: MITT) pays a forward annual dividend yield of 11.2%. MITT is a diversified mortgage REIT that manages a $3.6 billion investment portfolio. Although MITT’s share price has declined 10% over the past five years, its high dividend yield has generated a total return of 79% compared to 73% for the SPY.

Feeling All REIT

I believe demand for REITs will accelerate over the next decade. It is estimated that over the next 10 years, 10,000 baby boomers will turn 65 every day. Those retirees will need income, and lots of it. Bond yields are near historic lows. For example, the iShares Core U.S. Aggregate Bond ETF (AGG) pays a dividend yield of 2.7%. Try living on that in retirement.

In contrast, the VanEck Vectors Mortgage REIT Income ETF (MORT) yields 7.8% and pays dividends quarterly. It owns 25 REITs, with its largest holding comprising less than 13% of its total assets. To my way of thinking, this type of diversified ETF offers retirees the optimal trade-off between high income and risk management.

For further diversification, the Alerian MLP ETF (AMLP) pays an annual distribution of 7.9%. To complete the portfolio, consider adding a third type of RIC that owns business development companies (BDCs) that lend money to fast-growing companies. For example, the VanEck Vectors BDC Income ETF (BIZD) yields 9.3%.

These three ETFs pay an average annual yield of 8.3% and offer broad diversification across the entire economy. That means a $250,000 portfolio would pay approximately $20,000 annually without owning junk bonds or drawing down capital. For many baby boomers, that type of income scenario may be the only way to financially survive in retirement.

But rather than just survive, there’s a way to retire comfortably. My colleague Amber Hestla can show you how.

As chief investment strategist at Profitable Trading, Amber has found a way to generate robust income, whenever you need it.

Amber served in Operation Iraqi Freedom. While deployed overseas with military intelligence, she learned how to interpret data to forecast what is likely to happen in the future.

Upon her return home from Iraq, Amber started to apply these analytical skills to the investment world. She worked as a trader for a Registered Investment Adviser with $200 million in assets under management and as an independent research analyst.

Amber has devised a money-making system that she calls “dividends on demand.” It’s exactly like scheduling a dividend payment whenever you want. There’s no application form and no waiting period. What to join Amber’s team? Click here now for details.