This REIT Fund Yields 6%
Contrarian Outlook | Feb 20, 2020 07:51AM ET
There’s a way you can buy into today’s healthy real estate market without paying full price. In fact, you can get in for a lot less—I’m talking 16% below market value.
This may sound impossible, but it’s easy to do with closed-end funds (CEFs) . That’s because there’s a CEF that invests only in real estate, and its market price is actually 16% lower than the value of its portfolio of assets. There’s much more to this fund, too. Not only does it hold a diversified real estate portfolio, but it also pays out a 5.9% dividend that’s risen 73% in the last decade.
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Let me introduce you to RMR Real Estate Income Fund (NYSE:RIF) and explain why it’s worth considering now.
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The REIT Angle
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RIF, like many real estate-focused CEFs, invests in real estate investment trusts (REITs) . You can think of REITs as a kind of pass-through investment: these landlords collect funds from investors, hire real-estate experts to buy, rent and sell properties with those funds, then pass 90% (or more) of the rents they collect to us as dividends. And if the REIT’s real estate portfolio appreciates, we get our big rent-driven income streams, plus capital gains, too.
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REITs can also help you diversify your own personal real estate holdings beyond your own house and, say, a rental property. That’s because they have hundreds of properties rented to different tenants. A fund like RIF will diversify even further by buying many different REITs, resulting in a portfolio of hundreds (and potentially thousands) of offices, houses, apartments, self-storage units, hospitals and other kinds of buildings.
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What’s more, RIF (in blue below) has crushed the S&P 500—in orange, and represented by the SPDR S&P 500 ETF (NYSE:SPY)—for years, thanks to its 16% discount to net asset value (NAV, or the value of the REITs in its portfolio), which has narrowed somewhat over time.
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RIF Outruns Stocks
REITs are great on their own for the market-busting profits, but the REIT business model is tailor made for a CEF, thanks to the income angle.
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With their focus on maximizing income to shareholders, REITs are an ideal way for a fund manager to get a lot of income. The manager can simply buy shares in a lot of REITs, group them together, manage the portfolio and hand that income to shareholders. That’s how RIF can sustain a 5.9% dividend and increase its payouts over the long haul—at a time when safe, high payouts are increasingly tough to come by.
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To put RIF’s income and share-price growth in dollars and cents, if you put $100,000 in RIF a decade ago, you’d be sitting on $51,300 more than an investor who chose SPY (NYSE:SPY).
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Not only is RIF making investors richer a lot faster than the index fund, but it’s also giving them a bigger income stream while their investment grows. Put $100,000 in RIF today and your dividend comes out to $1,475 paid quarterly, or $492 if you calculate your quarterly payout by the month. Put that same amount in SPY and your payout (again, paid quarterly) equals just $139 per month.
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Here’s the best part: RIF isn’t even the best real estate CEF out there! There are plenty more worth looking at. Some even pay dividends of 7% and up.
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4 Cheap CEFs to Buy Now (20% Upside and 8.4% Dividends Ahead)
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Let’s talk a bit more about that 16% discount to NAV that RIF is sporting. Buying a fund at a price like that often pays off, because a CEF’s discount is proven to slingshot its market price higher as it narrows, handing us a big gain on top of our outsized dividend payout.
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The trouble with RIF is that its discount rarely wanders north of 12%, so, even though the fund’s portfolio does a decent job of delivering upside on its own, we rarely get that thrilling surge that only a narrowing discount can give us:
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RIF’s Discount Rarely Ignites the Fund
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Truth is, the power of a vanishing discount is a force to be reckoned with in the investment world. To show you what I mean, look at what happened with another REIT-focused CEF, the Cohen & Steers Quality Income Realty Fund (NYSE:RQI). In late December 2018, it traded at a ridiculous—and totally unusual—13% discount to NAV.
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Fast-forward just eight months, and that discount had shrunk to just 1%:
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Discount Slams Shut …
Source CEF Connect
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And RQI—a “conservative” income play, remember—had exploded for a 49% total return!
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… And a “Boring” Income Fund Skyrockets
RQI isn’t nearly as good of a deal today, but that’s no problem, because I’ve lined up the next 4 CEFs ready to ride their massive discounts to big gains. In fact, these discounts are so ludicrous that I’m calling for 20%+ price increases in the next 12 months, on average, for these 4 funds!
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The best part? All 4 of these funds yield an incredible 8.4%, on average, now. So we’re already beating the market’s historical average return in dividends alone—without even counting the 20%+ price upside we’re lined up for!
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Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement ."
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