Last week I recommended that readers start averaging in to some of my favorite REITs. Since then, all have rallied hard. Realty Income (O), National Retail Properties (NNN) and Retail Opportunities Investment Trust (ROIC) are up 3.8%, 8.0%, and 4.3%, respectively.
But before you get too excited, keep in mind that the past week’s gains just barely made back the losses of the preceding three days.
So, what conclusions are we to draw from this? Is this a resumption of the bull market in income-focused securities, or merely a dead-cat bounce?
To put it in perspective, let’s take a look at what bond yields have done over the same period.
The 10-year yield peaked at nearly 2.7% before drifting back below 2.5% at time of writing. 20 basis points may not seem like a big move, but at current levels it represents a 7.5% decline.
What happened? There is no “official” answer, of course. But it would appear that the panic bond selling we saw the prior week had simply run its course. We had a correction; these things happen.
The Fed has made it clear that quantitative easing will not be stopping cold turkey. Bond buying will be slowly tapered if—and only if—the economy is strong enough to support it. But even if quantitative easing is being phased out, it’s unrealistic to expect bond yields to jump to 3-4% overnight. With inflation tepid at best and with the financial system still in the process of deleveraging, bond yields will likely stay a lot lower for a lot longer than anyone thinks possible. That has certainly been the case in Japan.
Let’s get back to REITs. In a world of sub 2.5% bond yields, a 4-5% current yield with a high probability of future dividend hikes is an attractive investment.
Could I be wrong? Of course. Investors could decide en masse that bonds are a terrible investment, dump them, and send the prices of all income-focused assets plummeting.
But the nice thing about a high-quality REIT portfolio is that it will continue to throw off a steady stream of income, irrespective of what the price does.
I expect the bull market of the first four months of the year to resume in the second half, and I expect it to favor more cyclical sectors like industrials and tech. But I also think it makes sense to make a little room for REITs as well. Even after the last week of solid gains, they are on sale.
IT'S A BUY
I reiterate my buy recommendations on O, NNN and ROIC and recommend aggressively buying on any dips.