It&a;rsquo;s a good time to be a virtual landlord. REIT (real estate investment trust) dividends just got a tax break, their stock prices are kicking off a rally &l;i&g;and&l;/i&g; their yields are &l;i&g;still&l;/i&g; on the generous side.
Let&a;rsquo;s start with those yields, because that&a;rsquo;s why we buy REITs. These firms get a pass from Uncle Sam if they dish most of their profits to us investors as dividends. (This generosity, by the way, has helped REITs outperform the broader stock market for much of their history.)
Current yields are higher than usual today and generally, this means that REIT prices are too &l;i&g;low&l;/i&g; (and should be bought).
We&a;rsquo;re talking REITs today because the current rally appears to have legs. Two weeks &l;i&g;before&l;/i&g; the major bottom, &l;a href=&q;https://contrarianoutlook.com/these-4-reits-will-thrive-as-rates-rise/&q; target=&q;_blank&q;&g;I told readers to buy REITs&l;/a&g;. My reasoning was simple: REITs would soon &a;ldquo;decouple&a;rdquo; from the long bond. On January 25 I wrote:
&l;/p&g;&l;blockquote&g;&l;i&g;In the short run, the &a;ldquo;rates up, REITs down&a;rdquo; theory puts on quite the show. When the 10-Year Treasury&a;rsquo;s yield rises, REITs usually fall. And when its yield drops, REITs usually rally. This inverse relationship tends to hold up over multiple days, weeks and even months.&l;/i&g; &l;i&g;However the &a;ldquo;long view&a;rdquo; shows that many of these short-term moves are merely noise. It is possible for REITs and higher rates to coexist in profitable harmony&l;/i&g;&l;/blockquote&g;
Over the previous 25 months, REITs &l;i&g;had&l;/i&g; indeed moved down whenever rates moved up (and vice versa).
Then, a funny thing happened. REIT prices indeed &a;ldquo;decoupled&a;rdquo; from long-term rates (on February 8 to be specific). Their stocks started to rally while the long bond chopped sideways.
As regular readers know, I&a;rsquo;m a bit of a &a;ldquo;REIT addict.&a;rdquo; I constantly comb the sector for timely deals, looking for big yields and bargains. I like to watch the movers and shakers &a;ndash; the stocks heading up as well as down.
Earlier in the year, out of the 257 or so REITs I follow, only five had stocks in uptrends. &l;i&g;Five&l;/i&g; out of &l;i&g;257&l;/i&g; moving higher!
Today, I count 146 with positive momentum. What changed? The &a;ldquo;first-level&a;rdquo; investors &a;ndash; those who buy and sell on headlines and cheesy maxims &a;ndash; began to realize that REITs can (and often do) move higher in the face of rising interest rates.
Also Mr. Market began to express doubt in Mr. Jerome Powell&a;rsquo;s view of the financial world. While Fed Chair Powell says he needs to hike rates another 0.5% &l;i&g;this&l;/i&g; year, the &a;ldquo;long end&a;rdquo; of the rate curve &a;ndash; set by the free market &a;ndash; appears to be saying &a;ldquo;enough already.&a;rdquo; The 10-year Treasury sits exactly where it did five months ago, and that&a;rsquo;s been enough to kickoff a party for our favorite one-click landlords.
Disclosure: none
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