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.

SPG Dividend Yield Chart

SPG Dividend Yield data by YCharts

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.

VNQ Chart

VNQ data by YCharts

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.

SPG PE Ratio Chart

SPG PE Ratio data by YCharts

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:

VNQ Chart

VNQ data by YCharts

And during the swoon in the summer of 2011:

VNQ Chart

VNQ data by YCharts

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).


INTC Dividend Yield Chart

INTC Dividend Yield data by YCharts


RDSA Dividend Yield Chart

RDSA Dividend Yield data by YCharts


HAS Dividend Yield Chart

HAS Dividend Yield data by YCharts

If you’re looking to home in on income producing stocks, better deals can be found outside the REIT sector.

Carla Fried is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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