REITs vs Dividend Stocks, Which is Better for Cash Flow?
Dividend stocks are getting slammed and many investors are wondering how to make up for that lost cash flow.
In this video, we’ll compare dividend stocks vs real estate investment trusts for cash yield and safety. I’ll show you why real estate is your best bet right now and how one fund in my portfolio is paying an 8%-plus yield.
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Real estate investment trusts (REITs) and stocks are two of the top ways investors build their wealth through many years. These two have huge similarities, but there are some aspects that investors look in order to decide which one to focus on. Even if these two are different from each other, owning both REITs and stocks in an investment portfolio is a huge plus to the investor.
For many years there has been a debate about whether stocks or real estate is a better investment for the long term and it's no longer new for expert investors to see these running at a close race for decades, sometimes the other one ahead of the other, sometimes behind. Clearly, it's not the end yet to declare a real champion, because they are constantly running the race.
The Death of Dividend Investing
Nation, you know I’m a huge fan of dividend investing, that safety in cash flows and the market-beating return you usually get…so you can imagine the look on my face when I saw this chart showing dividend stocks are getting slammed in this market. That’s the S&P 500 market index in green and that 11% drop year-to-date doesn’t make me feel all warm and fuzzy inside but look at the SPDR S&P Dividend ETF, the SPYD, in red here, more than 32% lower on the year!
Companies are slashing their dividends right and left from Alliance Data Systems to GM. Since 1926, dividends have accounted for 40% of the total stock market return and with a lot of people living off their dividend checks, this is an ugly picture getting even worse each month.
How REITs are Beating Dividend Stocks
I looked through my portfolio and was actually equally surprised that one investment was still producing the 8%-plus dividend yield it’s been paying since inception, a real estate investment trust.
So what I want to do with this video is compare those real estate options, the REITs against dividend stocks. We’ll look at how bad dividend cuts might get in stocks, which sectors could be hardest hit and how REITs are stacking up. Then we’ll look at how that REIT fund has been able to maintain its high dividend yield even through the worst economy since the Great Depression.
How Important are Dividends?
And again, it’s tough to overstate the importance of dividends for investors. Going back over almost 100 years of market data, those cash flows contribute nearly half the total return on the market. During the last crisis, companies in the S&P 500 cut their dividends by an average 29% over the two years through 2009 and if you consider dividends from S&P companies last year totaled $500 billion…that’s $125 billion investors could be losing if we see that kind of hit this year.
In fact, Goldman Sachs put out some analysis last week predicting dividend cuts averaging 25% and I think it could actually get a whole lot worse. A chart from Bloomberg on forecasted dividend cuts by sector shows where the real pain could come from. That orange bar is the expected percentage change in dividends during the second quarter with energy, consumer discretionary and real estate all facing major cash flow problems.
Not only are a lot of those companies facing unavoidable cash flow problems and mountains of debt but anyone taking a dime from the government bailout programs could be forced to cut their dividend for years to come.
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How Real Estate Stacks up in 2020
Now I don’t think real estate is totally out of the woods but like we saw a few weeks ago in that real estate outlook video, there’s a big difference in property type and how it will affect dividends. REITs with digitally-focused property as well as storage and industrial are actually doing really well while those mall owners and retail are just trying to stay solvent.
So before we get into the numbers, I want to send it out to the community. Which do you prefer, REITs, those real estate stocks or dividend stocks? Which do you think provide the better return and cash flow?
Of course, the big difference between REITs and dividend stocks is that real estate investment trusts are required to pay out dividends if they have taxable income. To keep that sweet tax exempt status on corporate profits, REITs have to pay out at least 90% of their taxable income as dividends to investors.
This means as long as REITs continue to book income, they can’t cut their dividend completely, like a lot of dividend stocks have done.
Another advantage of REITs is that because leases tend to be long-term, from three-to-five years and longer, the rents for commercial space are more stable compared to say a consumer company that has seen it’s sales evaporate on stay-at-home orders.
The downside to this is that real estate can tend to lag the recovery. You get those leases gradually renewing while stocks might see a surge in earnings all at once with the rebound.
Does Real Estate Beat Stocks?
And real estate has easily beaten stocks over the long-term. Equity REITs in the NAREIT index posted nearly an 1800% return over the 30 years through 2017 versus a return of just 700% for stocks in the S&P 500.
The problem over the last couple of months, and this is why I started looking closer at those REIT property types, is that the broad funds like the Vanguard Real Estate ETF, the VNQ, have underperformed the market. We see the VNQ here in green with a 19% loss year-to-date against the S&P 500 in red and an 11% loss on the year.
So this is when I started looking at those individual property types and the non-traded Streitwise REIT. Those of you in the nation will remember we looked at the Streitwise fund last year, a private fund that holds office space I non-gateway markets.
Since the fund invests in those non-gateway markets, or areas outside the main urban core, office demand hasn’t hit it as hard as we’ve seen in the larger cities. Also since it’s a closed fund, the net asset value doesn’t jump around with redemptions like you’d get in other REITs. That disadvantage of a lockup period on the investment has turned into an advantage now because the manager is able to guide the holdings through the chaos we’re seeing in the market.
And it’s working out. The Streitwise fund has been able to maintain that annualized 8%-plus dividend yield since inception. The fund owns over 400,000 square feet of Class A office space in Missouri and Indiana and has been able to keep vacancy low with strong tenants like Wells Fargo, Panera Bread and Allied Solutions.
Learn more about the Streitwise 1st Office REIT investment– a real estate fund paying 8% cash return since inception on high-quality office property.
Now even though REITs are beating dividend stocks now, I still think you should have a balance of both in your portfolio. The numbers favor real estate right now but look back at 2009 and it’s a different story so make sure you position in both and check out that link to the Streitwise fund in the description below.
Read the Entire Dividend Stocks and REITS Series
- 3 Ways to Analyze Real Estate Investments
- 7 Best Monthly Dividend Funds
- 5 Dividend Aristocrats You Can Hold Forever
- 7 Highest Paying Monthly Dividend Stocks
- 5 Monthly Dividend Stocks that Will Never Let You Down
