The broader market fell prey to a bear, with the S&P 500 the index has fallen as much as 20% since its recent peak in 2022. It is difficult to observe a decline in stocks, as it generally means that your net worth is falling. That’s why I focus more attention on dividends than on stock prices.
And if you like dividends, like me, one of the best places to find them is in real estate investment funds (REITs). Here are three reasons why, even though the market is plummeting, I still love my REITs.
1. A mental diversion
A stock price is nothing more than a number that goes up and down often irrationally throughout the day. If you pay too much attention to stock prices, you will give yourself a stomach ache. They can’t be predicted for short periods, and rotations don’t really have that much informational value, in my opinion.
This is why I prefer to pay attention to dividends, which represent a tangible return on my investment. REITs must pay 90% of their taxable income to maintain REIT status and avoid corporate-wide taxes. They are dividend machines.
When I follow my wallet through the month, I’m really just counting the dollars that have been paid to me in dividends (like a mini-Midas, I suppose). Dividends tend to be fairly stable over time, so it’s not particularly exciting.
I reinvest the dividends, so I’m happy to raise a few dollars more with each new quarter. And in the rare situation where there is a dividend cut, I know I have some research to do. (In all honesty, I monitor the company’s performance quarterly, so I’m usually aware of the risk of a cut before one occurs.)
The point is, I’m not looking at the value of my holdings on a daily basis, so the ups and downs of the market don’t affect me. And that helps me stay invested in both bull and bear markets.
2. A basic business
While the dividend-centric nature of REITs fits well with my dividend-centric investment approach, that’s not the only reason I like them. Another important factor is that I understand the REIT business model. REIT that I own, I like it WP Carey (WPC 5.27%), Real estate income, Simone real estate groupAnd Federal reality (FRT 0.83%), own property and rent it to tenants. It is not rocket science.
There are basic factors you need to understand, such as occupation (how much of the portfolio is rented out) and the dynamics of the property type (malls are different from malls, which are different from independent retail properties, for example) , among others . But those aren’t difficult to manage. In fact, listen to a single conference call from a REIT you’re watching and you’ll likely understand the basics of the business. Simple is good in my investment world, and REITs are pretty simple.
That said, don’t underestimate the value of this as the world around you gets more and more complicated. This latest bullish / bearish cycle has been particularly interesting on this front, given the rise (and now fall) of things like meme stocks, blank check companies, and companies that looked hot during the early days of the pandemic but since then. have imploded like a pandemic as driven demand for their services wanes.
3. The safety net of dividends
I am not retired yet, but my ultimate goal is to reinvest the dividends until I am ready to retire. So I can activate the income stream and live off my dividends, leaving my savings intact. With REITs like Realty Income and Federal Realty falling into the Dividend Aristocrat and Dividend King categories respectively (WP Carey is on the verge of becoming an aristocrat), I am confident that I will have a reliable base of passive income.
This concept is by no means an unusual approach, but it does offer another small advantage that most people don’t consider. At worst, the income I’m generating from dividend-paying stocks like REITs can be used to pay my bills today if needed. Not ideal, of course, but should I suddenly be out of a job, I know I have an income I can rely on.
So REITs are a small part of that safety net for me, as they tend to pay material dividends. That said, there are downsides to REIT income, as you have to pay tax on REIT dividends as if it were income earned. But I agree, as REIT dividends avoid company-wide taxes. What if I need the income? Well, I’ll just be happy to have quarterly (or monthly, in the case of Realty Income) dividend checks during a difficult time in my life.
4. Some REIT names I like
My favorite REIT is probably WP Carey. It has a diversified portfolio, spread across the industrial, warehouse, office, retail and self storage sectors. In addition, about 37% of the rentals come from outside the United States. And it has increased its dividend every year since its initial public offering in 1998. It’s the closest to a one-stop-shop REIT you can get in my opinion.
Another name worth delving into for dividend lovers like me is Federal Realty. The REIT owns malls and mixed-use complexes. It focuses on owning well-positioned assets in highly desirable markets, opting for quality over quantity in a portfolio of just around 100 properties. Development and redevelopment are key areas of interest, as it seeks to keep its portfolio relevant to tenants and consumers. That said, Federal Realty’s claim to fame is that, at age 54 and over, this Dividend King has the longest streak of annual dividend raises in the REIT industry.
An investment for a bear market or not
The big advantage here, however, is that buying REITs is not a bear market tactic for me. It is simply a core part of my dividend-focused long-term investment approach. The REIT dividends I collect help me get through tough times, both emotionally and financially. I’m as close to a perfect investment vehicle as I can probably find on Wall Street. This is why I buy them in both bull and bear markets, and why you might want to too.