Can REITs Defy 'Dividendsanity'?
Michael A. Gayed | Sep 04, 2012 01:20AM ET
– Bubba Watson
In a number of my various writings online, I’ve brought up the idea of “dividendsanity” which relates to the complete love for dividend-heavy sectors of the market by the investment community in the face of bond yields which reached all-time lows as an income alternative. All year analysts and portfolio managers would praise the Utilities (XLU), Healthcare (XLV), Consumer Staples (XLP), and Telecom (IYZ) sectors given their lower sensitivity to the economy and high dividend payouts. The problem is that in discussing these sectors, few brought up valuations, with Price-to-Earnings multiples reaching illogically high levels as money crowded into the safety trade due to the negative narrative.
One area of the investable landscape less talked about has been Real Estates Investment Trusts (REITs). I received an inquiry on Twitter (@pensionpartners) about REITs in the face of a recovering housing market and strong homebuilder stocks (XHB). It appears REITs, rather than defying dividendsanity, in many ways define it.
Take a look below at the price ratio of the Dow Jones Wilshire REIT Fund (RWR) relative to the S&P 500 (IVV). As a reminder, a rising price ratio means the numerator/RWR is outperforming (up more/down less) the denominator/IVV.
REITs have been a stellar performer relative to the broader S&P 500 since 2009, as investors sought the “safety” of dividends in the search for yield. Outperformance tends to occur in falling interest rate periods, but has now reached an extreme given that the P/E ratio of the industry is 51.60. That is not a typo – the performance of REITs has resulted in significant overvaluation. Note that the ratio appears to have topped out around 0.55, and has been falling since. I suspect it is entirely possible for the group to underperform meaningfully in the coming months, potentially reaching the horizontal support line of 0.47 I’ve drawn.
Bottom line? While housing is recovering, homebuilders are leading, and rates remain near all-time lows, REITs look to be a very expensive income play. Safety? Only known with hindsight – and high valuations make the possibility of being wrong only higher.
Disclosure: This writing is for informational purposes only and does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction, or as an offer to provide advisory or other services by Pension Partners, LLC in any jurisdiction in which such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. Pension Partners, LLC expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.
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