Step Away From Those Pricey REITs: How to Find Fairly-Valued Stocks With Fat Dividend Yields
For income-focused investors, Real Estate Investment Trusts have been an oasis in the desert lately.
With yields at least one percentage point higher than the payout on a 10-year Treasury note it’s not really surprising that investors are attracted to REITs. Morningstar reports that assets in REIT exchange-traded funds have grown from $15 billion a year ago to $26 billion today.
And it’s been a nice ride. Not only have REITs delivered sought after income, they’ve also posted strong price appreciation as well. The largest REIT ETF, Vanguard REIT (VNQ) has outpaced the strong advance of the broad market over the past year, as seen in this stock chart.
Sweet, right? Well, right now you’re also going to pay up to invest in REITs. Morningstar’s proprietary Fair Value measure says real estate is currently the most overvalued sector it tracks. A sector reading of 1.00 signals it trades at fair value, according to Morningstar’s analysis, which relies on discounted cash-flow estimates. Right now real estate is at 1.08 while the average for all stocks is 0.96.
Consider that the average price/earnings ratio for the S&P 500 index is about 14 right now. Major REITs including Simon Property Group (SPG), Public Storage (PSA) and Vornado (VNO) trade at much higher valuations, based on PE ratio.
Recent history also suggests REITS are not exactly ballast in down markets. Here’s what happened to the Vanguard REIT ETF and the SPDR S&P 500 ETF during the worst of the 2008-2009 tumult:
And during the swoon in the summer of 2011:
There’s no getting around the obvious fact that all stocks -- REITs included -- are going to take a hit in down markets, but right now you can get dividend yields in line with REIT payouts from stocks that have much better valuations. Using Ycharts screener to search for 3%+ yields from solid blue-chips trading at below-average PE multiples that earn an “attractive” rating turned up some intriguing options including Intel (INTC) , Royal Dutch Shell (RDSA) and Hasbro (HAS).
ROYAL DUTCH SHELL:
If you’re looking to home in on income producing stocks, better deals can be found outside the REIT sector.
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