Coronavirus Reveals the Right REITs for Retirement
A year ago, I postulated that real estate investment trusts (REITs) would enjoy growing popularity in the years to come. A REIT owns a portfolio of properties (or loans collateralized by properties) from which it collects income that is passed on to its shareholders.
My reason for favoring REITs is straightforward. There are 10,000 baby boomers turning 65 every day for the next 10 years. In retirement, they will need the high dividend yields paid by REITs to live.
Over the past 25 years, the REIT sector has produced an annual average total return of 12%. That’s about the same as the overall stock market, but with a major difference. Roughly half the return of REITs has been in the form of dividends, compared to less than half that amount for common stocks.
However, you might think REITs are doomed based on recent stock market behavior. Since March 4, the SPDR Dow Jones REIT ETF (RWR) has fallen 38%. That’s a third more than the 29% decline in the Down Jones Industrial Average over the same span.
Despite recent dire events, REITs will benefit from our expanding population of retirees. It may take years for the global economy to recover from the full effects of the coronavirus outbreak. Until then, bond yields will most likely remain well below their historical averages.
If so, then REITs may be one of the few investments still paying sizable dividends. For that reason, I believe some REITs have become oversold and likely to rebound strongly once the coronavirus scare has passed.
Know Your Tenants
So why are REITs suddenly on the outs? The answer lies in the unusual corporate structure of REITs. By law, they must pay out at least 90% of their net operating income to avoid income taxation. However, they are under no obligation to pay dividends out of retained earnings.
The concern on Wall Street is that the coronavirus outbreak will result in massive defaults on both residential and commercial real estate:
- Restaurants and bars are off-limits in most states.
- Shopping centers have become ghost towns as shoppers avoid large crowds.
- Office buildings are empty while employees work at home.
- Workers in the travel and hospitality industries have been laid off in droves.
If the coronavirus goes on much longer, will anyone still be able to pay rent? To be sure, certain categories of REITs will be under pressure such as the ones that own the types of properties listed above.
However, there are other categories of REITs that may benefit from the current crisis. In particular, data center and infrastructure REITs should benefit from increased demand from online workers and increased e-tailing commerce as a result of social distancing.
Also, REITs that lease primarily to government agencies and defense contractors should also do well. Federal, state, and municipal agencies always pay their rent, even during a recession. Likewise, the military is dependent on its network of contractors to maintain our national security regardless of the state of the economy.
I also expect REITs that own self-storage property to prosper over the next decade. Big houses in the suburbs are expensive to own and maintain. The recent trend for the millennial generation is to live in smaller quarters closer to downtown where the action is but storage space is hard to come by.
Pay as You Go
Thus far, the stock market has not spared any REIT category during the recent selloff. REITs of all types have taken a beating, regardless of the financial viability of their tenants. That creates an opportunity for investors with the courage to step up and buy when everyone else is selling.
To be sure, I do not recommending making a full investment today. Instead, I suggest dollar-cost averaging by purchasing the REITs you like in fixed amounts over a period of several months.
There is no way of knowing how much longer the coronavirus outbreak will upend our daily lives. We also can’t know the long-term financial ramifications of the current crisis. What we do know is that there has already been severe damage done throughout the global economy.
However, the day will come when the virus is over and the economy begins to recover. Until then, using an investment process that can thrive in any market environment is one of the few ways to protect your assets.
Which brings me to the traditional safe haven of gold. During this still-unfolding coronavirus crisis, Goldman Sachs (NYSE: GS) recommends buying gold, describing it as the “currency of last resort.” The investment bank recently predicted that we’re heading into a recession, projecting a U.S. gross domestic product drop of 5% for the second quarter of 2020.
The “Midas metal” is a time-proven hedge against the sort of uncertainty we’re now witnessing. Gold’s price has been rising, with plenty of momentum left. Our investing experts have pinpointed the best gold stock and it’s poised to explode on the upside. Looking for a “defensive growth” play that’s suited for these challenging times? Get our special report on gold.