Howdy, Stranger!

It looks like you're new here. If you want to get involved, click one of these buttons!

In this Discussion

Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.

    Support MFO

  • Donate through PayPal

Retirement: Why REITs Are Good Bond Replacements

edited December 2019 in Fund Discussions
https://seekingalpha.com/article/4310950-retirement-why-reits-are-good-bond-replacements

Retirement: Why REITs Are Good Bond Replacements

Summary

Historically low – and even negative – interest rates are making it harder than ever to retire.
REITs are a viable alternative to retirees and other income investors who desire greater income without having to take significantly more risk.
Our method enables us to earn high and stable income from real asset backed investments.

Comments

  • edited December 2019
    If you open and read this, there is an image of the guy that wrote this blog and he looks like he may have been about 15 years old when REITS crashed in 2007-2009, so I don't think he understands the pain REIT investors felt at that time. I don't know how he can make this summary statement below. If I look at the Vanguard ETF for REITS, VNQ, it lost 70%+ peak to trough during the great recession. Would that be considered a bond alternative with less risk for retirees?
    REITs are a viable alternative to retirees and other income investors who desire greater income without having to take significantly more risk.
  • I’ve got about 7.5% of my IRA invested in Fidelity’s real estate income fund, FRIFX, and consider it part of my bond/income allocation. Its yield and long term returns are comparable to some of the better high yield bond funds. What I like about is that its returns often differ from both bond and stock funds, so it’s an excellent diversifier for a portfolio. It held up much better in the 2008-09 crash than regular REIT funds.
  • ron
    edited December 2019
    any thoughts on why some REIT's have performed so poorly this week?
  • edited December 2019
    ron said:

    any thoughts on why some REIT's have performed so poorly this week?

    The U.S. 10 Year Treasury rocketed up to 1.94% today from somewhere around 1.8% yesterday. That’s a huge one day rise. Earlier in the year it dipped briefly below 1.5%. Bonds (and REITS) tend to move in opposite direction to interest rates. To answer your question - REITS have probably been reacting to the steepening rates for a while. The REIT I sold off a month or so ago (OREAX) fell 1.64% today. I still track it and find it a pretty good bellwether for the REIT market. Generally, the 10-year bond yield has considerable impact on mortgage rates going forward.

    The steep bump up in rates was obvious across the spectrum of investments today. Bonds (and many bond funds) fell. Financial stocks rose sharply. Looks like utilities fell back a bit - another area that runs with bonds - and opposite interest rates.

  • @MikeM, It is good that you recalled REIT sector that performed poorly during 2008.

    @hank, thank for your explanation on this week's decline on REITs.
  • Tarwheel said:

    I’ve got about 7.5% of my IRA invested in Fidelity’s real estate income fund, FRIFX, and consider it part of my bond/income allocation. Its yield and long term returns are comparable to some of the better high yield bond funds. What I like about is that its returns often differ from both bond and stock funds, so it’s an excellent diversifier for a portfolio. It held up much better in the 2008-09 crash than regular REIT funds.

    what he said --- me too, and am going to increase
  • edited December 2019
    I have owned the Fidelity Real Estate Income Fund (FRINX) for about seven years with it being a member of my hybrid income sleeve. Thus far my total return in the fund has averaged a little better than 9% per year with an income yield of a litte better than 4%. With this, I've had some capital appreciation in this position during my seven year holding period as well as the production of income in the form of dividends and capital gain distributions pusing my income distribution yield upwards and north of 5%.

    According to Xray this fund's asset allocation is listed at 7% cash, 30% US stocks, 1% foreign stocks, 38% bonds and 8% other (most likely convertibles and preferreds). I'm thinking that the referenced stocks are actually reits. As I write, according to M*, it is off its 52 week high by 1.42%.

    In checking this fund at MFO it carries a MFO rating of 5 (best), a risk rating of 2 (conserative) and a bear market rating of 1 (best).

    For me, this is a nice income generating fund and one that I plan to add to my position over time as I grow the income area of my portfolio.
  • @ron - the short answer (which pretty much aligns with what hank said):

    "Over the second half of the year, as global central banks made a U-turn and moved from tightening monetary policy to setting rates lower, investors have begun positioning for extra innings in the expansion. That means the "reflation" trade is back on: brisker economic activity will bring higher inflation, the theory goes, which makes bonds and other conservative, dividend-producing assets like utilities and real estate less attractive." (Source: MarketWatch)
  • beebee
    edited December 2019
    An alternative view:
    An important aspect of this conversation is that, while REITs provide a higher level of income than most other stocks, income from investments is not, in itself, a useful goal. Rather, it’s total return that matters, because capital appreciation can be used to fund living expenses just as well as income can. For instance, in a given year, if a given mutual fund provides an 8% total return, it does not matter whether the return is 8% from income and 0% from capital appreciation, 8% capital appreciation and no income, or any other combination in between.

    An important exception is that if we’re talking about a taxable account (as opposed to retirement accounts such as IRAs or 401(k) accounts), income is actually detrimental relative to capital appreciation, because it results in an immediate tax cost rather than a deferred tax cost. And as a result, it can even make sense to underweight REITs in taxable accounts.
    Link to Article:
    overweighting-reits-why-dont-more-experts-recommend-it
  • Excellent points @bee. Bonds, REIT funds and such are fine for diversification, a good idea for that purpose, but buying them for their income distribution inside a tax deferred account doesn't have much meaning.

    People are being swayed away from the usual income generator, bonds and taking on a lot more risk for a purpose that doesn't matter inside tax deferred account. REITs are just as volatile as stocks most of the time. How can that be seen as a bond substitute as the article suggests? I see REITs as an equity substitute myself.
  • edited December 2019
    @MikeM - I'm having trouble following your reasoning. First off, many of the REIT investors I know of are not consumed by TR nor do they view it as the 'be all to end all'. It's always nice if they get it but they're more interested in the income stream REIT's provide. Buying REIT's when they've been beaten up can be rewarding (however now is not that time). Bonds and bond funds are also capable of gyrations.

    Second, I don't understand this statement you made at all "... but buying them for their income distribution inside a tax deferred account doesn't have much meaning." The REIT's I own are all stuffed in a Roth IRA precisely to avoid income taxes on the distributions generated. I can also sell them free of capital gains taxes when prudent. What am I missing? According to M* buying REIT's in tax deferred accounts is the best place for them.

    I meant to add this section from Bees' earlier linked capital gains distribution article:

    "Consider Asset Location
    Ultimately, an investor's best weapon against unwanted taxable income or capital gains distributions is to pay attention to which assets you hold in tax-deferred accounts (such as 401(k)s and IRAs) versus taxable accounts (such as brokerage accounts). Certain types of investments tend to be less tax-efficient because they are more likely to pay out taxable income or gains than others. These include high-turnover actively managed funds, some types of bond funds including high-yield corporate-bond funds, and REIT funds. Such holdings are a better fit inside of a tax-advantaged account such as a 401(k), IRA, HSA, 529, and the like. By contrast, municipal-bond funds as well as many index funds and ETFs can be good choices for taxable accounts."
  • edited December 2019
    Everybody makes some excellent points. There are two different ways of looking at allocation that might be muddling the messages here. If “allocating” between taxable and tax-sheltered accounts (like IRAs) than it makes sense to keep income generating assets in the tax-sheltered vehicles, as income is normally taxed at higher rates than long term cap gains.

    What I have difficulty understanding sometimes is: within a total portfolio why it’s necessary to differentiate between the income producing assets and the rest? As @bee points out, what you really care about is total return. Now, albeit, income producing assets might possibly help smooth out the ride - making total return less volatile and more predictible on a yearly basis. But that really gets us into the second way of viewing allocation - as a way to reduce risk and volatility. So, while I now devote 25% of my IRA to two income producing funds (RPSIX, DODLX), it’s done strictly out of a desire to lower the downside risk and achieve more stable year-year total returns. That they churn out income isn’t what’s appealing to me. It’s the lower volatility and the fact that bonds often “zig” when equities and other asset classes “zag.”

    To each his own. If your method works for you, that’s what’s important.
  • edited December 2019
    Hi guys,

    Since, I am retired and in the distribution phase of investing I like my portfolio to generate ample income to meet my needs. In this way, I do not have to sell assets to meet cash distribution needs.

    In addition, I also look at it in this light. I look at each share owned in a mutual fund much in the same way a farmer looks at an acre of land. While the share/acre is in production it generates some form of income or growth in most cases. Start selling shares/acres to raise cash then pretty soon nothing is left to generate the needed production.

    By the way ... even in retirement ... I'm growing my number of shares/acres owned thus increasing my production. And, income generation is a part of this production along with growth of capital.

    I agree with hank's comment ... "To each his own."

    Is it not great that there is no one way to success (or failure) in investing?

    Old_Skeet
  • Like the goose that laid the golden eggs.
    Different strokes for different folks !
    @Old_Skeet: Is it more profitable to do the farming or rent the acreage out ?

    Derf
  • edited December 2019
    Hi @Derf: Years back my family sold off farm land (piecemeal) and went from harvesting cash crops from the soil to havesting cash dividends from the stock market. Currently, the only property I own is my homestead and a scond home located on the coast of South Carolina. In a sense, I'm still farming but the harvest now comes from the capial markets.
  • @Old_Skeet: That's what I was thinking when I read your post.
    Have a good weekend, Derf
  • edited December 2019
    @Old_Skeet ,

    Thanks. That sounds like a perfectly sane and rational system. (I probably could have written that response for you.:))

    A plan, such as you and I both adhere to, serves many purposes. Two of the most important IMHO are: (1) It instills self-discipline & structure upon what might otherwise devolve into a haphazard approach, (2) It provides a clear and easy to interpret picture of how one’s investments are structured and how well different components are performing. The second is useful in deciding how much can be safely withdrawn yearly, as well as when / how to rebalance.

    Being a rather disorganized person, I’d be completely lost without a clearly written plan. The allocation model I’ve used for 20 years (with updating for age) must be a pretty good one - because anytime I’ve considered drastically altering it I’ve been drawn back to the existing plan. While many markets, IMHO, have appeared “dicey” to me for years now, I’d hate to have had everything sitting in “safe” money market instruments pulling 1-3% yearly over the past decade.

    Regards

    OH - The thread is about REITS. I’ve dabbled in the past in a REIT fund as one of the holdings in my “real assets” group (10% weighting). I’d prefer to buy them at depressed prices, as this asset has been through 2 or 3 nasty downtrends over the past 25 years that I’ve closely watched markets. But if you’re young and don’t mind the potential volatility they may be fine. Personally, I’ve vacated my small hold in one and moved on to some more depressed sectors.
  • edited December 2019
    Hi @Mark. I think in general we are saying the same thing, I think.

    My original point was a reaction to the post article statement,
    "REITs are a viable alternative to retirees and other income investors who desire greater income without having to take significantly more risk."
    To me it would be ridiculous to do a 1 for 1 substitution of bonds for REITs in a diversified portfolio as the author implies. That portfolio would no longer have the same risk tolerance. I see nothing wrong with using REITs in a well balanced portfolio, but if you substitute your bond portion of the portfolio for REITS (as the author states is "safe" to do to get extra yield) you are taking on the same additional risk as substituting bonds for equity funds in my opinion. Both equities and REITs have similar volatility risk. As I mentioned, Just look at what happened to REITs in the great recession. They tanked as much or more that equity.

    Second, my statement, "... but buying them for their income distribution inside a tax deferred account doesn't have much meaning." By "meaning" I meant that it doesn't matter how that REIT fund or any type fund generated its total or final return to you, by yield or by growth, doesn't matter. If you sell the REIT mutual fund inside your IRA (or your Roth) you are just selling the total return that fund generated for you. Didn't matter that it yielded 5%. All that did was increase your total return 5%. Sell that REIT fund or sell an equity fund, what is the difference when it converts to cash?

    I will say that if you or maybe old skeet is converting that yield distribution to cash to be used as withdrawal income, that seems to me to just be a convenient way to distribute that income for cash use. A nice idea but I don't see the difference of putting distributions back into the fund balance to let it grow and selling bits of the fund itself as needed.

    What I'm not trying to say is that high yielding funds like REITs aren't part of a well diversified portfolio. I think they can be. I'm just trying to say, when you convert that fund to cash, it is only total return that mattered.
  • Good Day @MikeM. Yes I think we are saying pretty much the same thing now that you explained your thoughts. The attached article lends a more in-depth discussion.

    Good News Becomes Bad News For REITs

    FWIW I'm not buying more REIT's at this time but I am on the lookout for bargains. Timing and patience as they say.
  • edited December 2019
    Great find @Mark,

    As folks in these (REIT) funds know, self-storage is often an important component (normally around 10-20% of holdings). The article you linked notes fierce competition, oversupply and cooling of demand in the self-storage market.

    “In addition to our report on the homebuilding sector, we also published Self-Storage REITs: Storage Wars Wage On. Once a perennial top-performer in the REIT sector, developers and new operators have flocked to the sector in recent years, adding new supply at a furious rate, weakening fundamentals. 2019 was shaping up to be a strong year for the sputtering self-storage REIT sector, but 3Q19 earnings were a setback on the road to recovery. Competition remains fierce in an oversupplied market. Symptomatic of the ongoing storage wars, marketing spending jumped nearly 60% from last year for these REITs, pressuring same-store NOI growth to essentially zero.”

    Got me to wondering if there’s some linkage (albeit a bit stretched) between this and the boomers now being 70+ and possibly ridding themselves of various RV vehicles? Personally, I rid myself of a boat recently after 40+ years of boat ownership and no longer rent a self storage unit for it. I’d imagine other types of RV owners also used these convenient storage options.

    Here’s an article documenting a slowdown in RV sales:

    The RV industry is slowing down after 10 years of growth https://www.curbed.com/2019/6/17/18682121/rv-campers-industry-economy-economic-impact-jobs-2018

    The oldest post WW II boomers are now nearing 75. That generation (to which I and many here belong) has had profound impacts on virtually every economic sector over most of the last century including: education, auto and home sales, RV sales, stock and bond markets, brokerages, health care, insurance. The list goes on ...
  • @hank. So is it time to trade self-storage reits for storage-of-self reits?
  • edited December 2019
    Anna said:

    So is it time to trade self-storage reits for storage-of-self reits?

    @Anna - There is such a company: https://www.nbcnews.com/tech/innovation/company-will-freeze-your-dead-body-200-000-n562551 (a link allows you to get around the ad-block blocking.)

    the practice of preserving a body with antifreeze shortly after death ... - Strikes me as not a novel idea. I’ve known guys who routinely do that ahead of time.
  • MikeM said:

    If you open and read this, there is an image of the guy that wrote this blog and he looks like he may have been about 15 years old when REITS crashed in 2007-2009, so I don't think he understands the pain REIT investors felt at that time. I don't know how he can make this summary statement below. If I look at the Vanguard ETF for REITS, VNQ, it lost 70%+ peak to trough during the great recession. Would that be considered a bond alternative with less risk for retirees?

    REITs are a viable alternative to retirees and other income investors who desire greater income without having to take significantly more risk.
    The above and other posts by MikeM are what I have been saying for years. If I want higher income I use funds like Multisector funds such as IOFIX and PIMIX. If you are looking for high income + a good total return, look no further than PCI,PDI and other Pimco CEFs.
    My opinion is that PCI will have a better performance than stocks in the next 5 years and if you are a trader you can avoid the big losses too by using weekly MACD as a good indicator. See PCI (chart) and use it to buy PCI when weekly MACD is positive and sell when it's negative
  • There are others FD. RQI is up 36+% this year, VNQ 24% something. I already own the others mentioned except for PIMIX. Everyone has to find their own groove.
  • Hi @Hank, in contrast to what you found on over-capacity for self storage REITs, I have a friend at work that she and her husband have been building self storage units as a side business and they can't keep up with demand. They have the units rented even before they are built. They got into the business maybe 10 years ago with another person but have since bought him out. She wishes they could afford to expand but they don't want to take on to much debt. I guess multiple units can cost $100's of thousands to build.

    In any case, what was interesting to hear was that many of their clients are small business owners, construction, trades, sales people who work from their homes but need a place to store material.
Sign In or Register to comment.