Equity REITs: Still Worth Buying?
Charles Sizemore | Mar 25, 2015 12:39AM ET
Equity REITs, which invest typically in commercial buildings, apartments and other properties, have been a hot asset class over the past 14 months. As a sector, REITs are up about 30% since January of last year, including dividends. That’s about double the S&P 500’s total return over that period.
After a run like that, are REITs still cheap enough to consider buying?
You bet they are.
As I wrote last week , mainstream U.S. stocks are very expensive at today’s prices, trading at a cyclically-adjusted price earnings ratio of 27. This is more expensive than they were in 1929 and 2007 — both before their respective meltdowns.
But looking at REIT dividend yields, we see a very different story. Apart from the brief spike in yields that happened during the 2008 meltdown — remember, falling prices mean rising yields — REIT dividend yields have barely budged over the past decade. Since 2006, they’ve essentially bounced around in a range of about 3.2% to 4.0%:
As you can see, that’s a far cry from the 8% yields that were the norm for the 1970s, ‘80s and even parts of the ‘90s. But remember, we’re in a very different world today, one in which bond yields scrape along at lows that few ever believed possible.
In 1980, CPI inflation was 13.9% and the 10-year Treasury yielded over 12%. That made the 8% dividends offered by REITs look terrible by comparison.
Today, REITs as an asset class may yield only 3.4%, but that looks pretty good in a world where CPI inflation and the 10-year Treasury yield are both below 2%.
If you believe — as I do — that this period of low inflation and low bond yields still has a few years left to run, then REIT dividends at today’s levels look like a very solid value.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.