Although I’m nowhere near ready to retire, I enjoy reading over retirement lists hoping to one day enjoy a stress-free like basking in dividends. One such list that gets me excited is Forbes' list of “the best places to retire that offer both affordability and a high quality of life”.
(Source)
As you can see, there are quite a few names close to where I live now, in the southeastern U.S., and that makes it easier for me to retire there. I used to own a Papa John’s store in Brevard, NC, and I could see how that town made it on the list. Delray Beach is also a gem, if you can manage the heat.
Each year, Consumer Reports releases a report on the top cars for seniors that ranks cars based on needs that the younger generation doesn’t necessarily think about but may be crucial for a senior driver. The report measures things like ease of front seat access and readable, intuitive buttons.
As you can see below, several Subaru and Kia models have the most of these recommended features. While these cars were rated with seniors in mind, they are comfortable and safe choices for anyone looking to buy a car.
- Subaru Forester
- Hyundai Santa Fe
- Kia Sorento
- Subaru Outback
- Honda CR-V
I’m a big guy (around 6’3”), so these cars don’t really appeal to me. And besides, I can’t see myself driving around Delray Beach in a Kia Sorento, maybe a new Tesla Model S (List: $89,400).
(Source)
Another idea is that I could become a full-time RV’er after retirement, traveling across the country conducting “boots on the ground” property inspections for iREIT on Alpha members. I could travel coast to coast, while living a minimalistic lifestyle and bringing only the essentials (my laptop and Netflix account).
(Source: International Living)
Another important consideration for retirees is finding the best credit cards.
Hopefully by the time I retire, I can build up a sizeable nest egg in dividend income so that I can fund 100% of my living costs. Here’s a list of WalletHub’s best credit cards for retirees:
- AARP Rewards Credit Card: 20,000 bonus points worth $200 cash back when you spend $500 in the first 3 months. 3 points per $1 on gas station and restaurant purchases and 1 on everything else. You can spend points to pay your AARP membership or redeem for other things like gift cards and travel. No annual fee. Requires good credit.
- Citi Double Cash: (I use this one) 1% cash back on every purchase, another 1% when you pay it off. 18-month 0% APR on balance transfers to help take care of any lingering loans. No annual fee. Requires good credit.
- Amex Blue Cash Preferred: $200 statement credit when you spend $1,000 in the first 3 months. 6% cash back on up to $6,000 per year at U.S. grocery stores, 3% at U.S. gas stations and select department stores and 1% everywhere else. That’s great for everyday retiree expenses. 12-month 0% APR on purchases and balance transfers. Requires good credit.
- Capital One VentureOne: 20,000 miles, worth $200 in travel, for spending $1,000 in the first 3 months. Unlimited 10 miles per $1 spent at hotels.com/venture and 1.2 on all other purchases. Use the miles to take a trip and start enjoying your retirement. 12-month 0% APR on purchases. No annual fee. Requires good credit.
- Chase Sapphire Preferred (I use this one): 50,000 points, worth $625 in travel, for spending $4,000 in the first 3 months. 2 points per $1 on travel and dining and 1 on everything else. Points worth 25% more toward travel. $95 annual fee waived the first year. Requires excellent credit.
- Chase Slate: 15-month 0% APR on balance transfers and purchases. No balance transfer fee if transfer made in the first 60 days. No rewards. No annual fee. Requires good credit.
Now, before I get down to business and provide you with my top REITs for retirees, I thought I would provide you with a list of the “Top 10 investment sites to invest like a pro”. As you can imagine, Seeking Alpha ranks high on that list (Source: Well Kept Wallet).
(Source: Well Kept Wallet)
The author, Josh Patoka, provides this testimonial:
“... arguably one of the best free investments sites for free advice. I personally subscribe to the daily Wall Street Breakfast email that includes a quick summary of the market’s top headlines. It let me quickly track any recent moves for the positions I hold or planning to acquire.
You can also read articles to get investing ideas and read market commentary from Seeking Alpha contributors. Personally, I use these articles during the research phase so I better understand an investment recommendation.”
Here’s the complete list of sites that Patoka recommends:
- Morningstar
- Investopedia (formerly a contributor)
- Zacks
- Seeking Alpha (is this your favorite site???)
- AAII (I subscribe)
- Barron's (I subscribe)
- Ino
- Kiplinger (I subscribe)
- CNBC
- Stock Rover
Now you get a sense of my retirement blueprint: I want to drive a Tesla, live in Delray Beach, and drive an RV to the mountains (in Brevard) when it gets too hot in Florida.
And, of course, I want to continue to write articles on Seeking Alpha as a means to generate more followers, who hopefully will consider subscribing to iREIT on Alpha or read my book, The Intelligent REIT Investor (working on new version this summer).
But none of my retirement dreams could not be possible without dividends, and of course, I’m referring to my durable REIT dividends. And before I provide you with 4 of my top REITs for retirement, I want to remind you that they key to my blueprint (and hopefully yours) is to always maintain adequate diversification.
I’m sure you see that I am now writing one weekly non-REIT article as a means to assist investors and to also diversify my retirement portfolio. Over the last few weeks, I have written on the following companies and become a stakeholder in each of them (click links to my articles that were co-produced with Dividend Sensei).
- Bristol Myers Squibb (BMY)
- Prudential Financial (PRU)
- Apogee Enterprises (APOG)
- Gorman-Rupp (GRC)
- MPLX LP (MPLX)
- Enbridge (ENB)
While I remain focused on REIT research, it’s important for all investors to maintain sound diversification strategies. As you may know, I’m substantially overweight REITs, yet my retirement blueprint is centered around being diversified with exposure to all major asset classes.
For retirees and pre-retirees (i.e., everyone), I recommend Dr. Craig Israelsen, Ph.D.’s, 7/Twelve Portfolio as an alternative to the standard 60% equity, 40% fixed-income portfolio. As illustrated below, the 7/Twelve model (on the right) replaces the traditional 60/40 model:
(Source: 7/Twelve Portfolio)
The 7Twelve Portfolio stands for “7 Core Asset Groups”: US Stocks, Non-US Stocks, REITs, Resources, US Bonds, Non-US Bonds and Cash. Israelsen explains that:
“Great salsa is all about diversification. Only by adding diverse ingredients together can we achieve the desired outcome. However, there are some ingredients in salsa that most of us would never want to eat individually, like hot peppers or Tabasco sauce. But, without the “hot” ingredients the salsa would be flat.
Similarly, investment portfolios should include a wide variety of diverse ingredients or “assets”. Mutual funds that invest in US stocks are a core ingredient for a portfolio, analogous to tomatoes in salsa.
But, US stocks are only one asset class. More asset classes are needed. We need non-US stock. But, even after adding non-US stock, our portfolio still only has “stock” ingredients. We need diversifying ingredients such as bonds, real estate and commodities.”
(Source: 7/Twelve Portfolio)
As shown below, REITs are the “top-performing” asset class based on the 20-year annualized returns for all asset classes in the 7Twelve Passive ETF Portfolio and the 7Twelve Passive ETF Portfolio itself from January 1, 2000 to December 31, 2019.
The second- and third-best performers are midcap US stocks and small-cap US stocks. The two worst performers were cash and non-US developed stock.
The 20-year average annualized return of the 7Twelve Passive ETF Portfolio from 2000-2019 was 6.82%, assuming annual rebalancing (or 6.65% with monthly rebalancing). The 7Twelve Portfolio demonstrates its value over time by providing consistent performance and avoiding large losses. (It is worth noting that the 7Twelve Portfolio outperformed large US stock (S&P 500 Index) over the past 20 years.)
(Source: 7/Twelve Portfolio)
Now, This Is What You’ve Been Waiting For…
There’s a good reason that REITs have outperformed all of the other asset classes, and it’s summed up in one word: predictability.
Over the decades, REITs have become much safer investment vehicles based upon the fact that their income streams are much more predictable. Even during the current COVID-19 cycle, I am amazed to see “most” real estate property sectors performing “better than expected” based upon prudent capital management practices and the lessons learned from the great recession.
That’s not to say that all property sectors are performing wonderfully - namely, malls, prisons, and hotels - but for the large part, many REITs have shown their resilience during these uncertain times.
Like any stock, REIT or not, the key to investing is to look for companies that can withstand the test of time. “Sustainability is much more important than the magnitude of economic profits” or as Heather Brilliant and Elizabeth Collins explain in Why Moats Matter:
“... a highly certain 20-year stream if modest economic profits is much more moat worthy than a few years of extraordinary high returns on invested capital.”
There’s a reason that we’re not recommending REITs like EPR Properties (EPR) and UMH Properties (UMH) during such uncertainty. Why risk your hard-earned capital to chase a possible “one-hit wonder”?
Instead, our screening process is based on predictability, reliability, and durability. As Warren Buffett explains:
“The key to investing is …determining the competitive advantage of any given company and, above all, the durability of that advantage. The products or services that have wide, sustainable moats around them are the ones that deliver rewards to investors.”
Our first “retire rich REIT” is Omega Healthcare Investors (OHI), a skilled nursing REIT that has returned an average of 9.6% since the end of the Great Recession (12-31-09). I have owned OHI for over seven years, and this REIT was one of my best performers (in the Durable Income Portfolio) in 2018, when shares returned over 37%.
In a recent article, I explained that “while headwinds still persist for this company with regard to the long-term reliance on government checks in the skilled nursing and SHOP markets, the fact remains that demographics, with regard to the aging baby boomer population, still look attractive for this company”.
Omega understands “predictable” income and “OHI's commitment towards the dividend is impressive” - and “as of today, OHI is on a 17-year annual dividend growth streak. This means that the company was able to make it through the Great Recession period in 2008/09 without being forced to cut.”
The share price is attractive (shares have returned -28.9% YTD), and so is the current yield (9.3%). The company’s P/FFO has averaged 13x since 2009, and today, shares are trading at 9.5x - a 27% discount. Although growth prospects aren’t as rosy this year, analysts forecast modest -2% growth in 2020. The future looks bright based upon 4% consensus growth in 2021 and 2022.
More importantly, the CARES Act provides confidence that many of OHI’s operators will have adequate liquidity. Based on our view of the company, and safety of the divided (payout ratio is 89%), we are upgrading from a Buy to a Strong Buy (which means we are forecasting shares to return 25% annually).
(Source: F.A.S.T. Graphs)
Our next “retirement” REIT is LTC Properties (LTC), a monthly payer that has also maintained a predictable rental stream. Similar to OHI, LTC invests in the skilled nursing sector (~47% is skilled nursing and ~53% is assisted living).
Although not as large as OHI, LTC has maintained one of the best balance sheets in the healthcare sector: its debt-to-enterprise value is 32.6%, and net debt-to-annualized adjusted EBITDAre is 4.4x.
LTC’s Enterprise Value is ~$2.1 billion, and the company has around 25% of that figure in liquidity ($510 million available on its unsecured line and $200 million available on its ATM offering program).
Since 2010, LTC has grown its annual dividend from $1.58 to $2.28 per share, and the company has never cut its dividend. In Q1-20, the FAD payout ratio was 79.2%, and it’s because of this discipline that we included this REIT on our list.
The share price is attractive (shares have returned -16.6% YTD), and so is the current yield (6.3%). The company’s P/FFO has averaged 21.7x since 2009, and today, shares are trading at 11.9x - a 45% discount. LTC collected 93% of its April contractual rent, and the company also collected 90% from 9 of its top 10 operators. As viewed below, LTC’s risk profile and discounted valuation warrant a Buy.
(Source: F.A.S.T. Graphs)
Next in line is W.P. Carey (WPC), a net lease REIT that has provided investors with an impressive record of 22 years in a row of consecutive dividend increases (since going public in 1998). I have been an investor in the company for a number of years, and since the last recession, shares have returned an average of 13.3% annually.
One of the biggest attractions to WPC’s business model is its focus on “mission-critical” office and industrial properties. Accordingly, the company has maintained stable occupancy during the credit crisis and economic downturn (occupancy is now 98.8%).
Also, approximately 99% of WPC’s leases have contractual rent increases, including 62% linked to CPI (consumer price index). This provides the company with steady contractual same-store growth (of 1.8%) and comprehensive same-store growth (of 0.8%).
WPC also has a strong balance sheet (BBB by S&P) and risk management profile with access to multiple forms of capital. The analyst scorecard for 2021 reflects -5% FFO/share growth in 2021, which is likely attribute to the company’s non-investment grade tenants.
However, the valuation remains attractive to us, based upon the current P/FFO of 14.4x (compared with the normal range of 16.2x) - an 11% discount. Also, WPC’s dividend yield is 6.3%, which provides support to our Buy thesis.
(Source: F.A.S.T. Graphs)
Our final “retire rich with REITs” pick is Realty Income (O). Since the end of the last recession (12-31-09), shares have returned an average of 11.6% per year, and the average return since the recession before that (10-31-01) has been 10.6% annualized.
I consider O to be of one of the most predictable REITs that I own, and regardless of the economic or political environment, the company has been a textbook example of dependability.
Last week, I guest-lectured virtually at Georgetown University, and I was explaining to the students how O had weathered the various cycles because of its scale and cost of capital advantages - even in this current COVID-19 environment, in which O’s diverse operating platform has provided a quantifiable margin of safety with regard to its exposure in theaters and restaurants.
It’s true, O has exposure to these higher-risk categories, but because of limited exposure to one category, it appears likely that the company will dodge a dividend cut or suspension.
And it’s clear that any company that calls itself “the monthly dividend company” is serious about dividend growth. Dating back to its listing in 1994, O has increased its dividend 106 times, or 26 years in a row.
During that time, the company has generated compounded average annualized growth of 4.5% and since its listing, O is one of only three REITs that have been included in the S&P 500 Dividend Aristocrats index.
But as I told the students, the company’s primary weapon is its cost of capital advantage, which has resulted in one of the most coveted high-quality portfolios (48% investment grade rated tenants) that deliver some of the most predictable profits (23 of 24 years of positive FFO per share growth).
O shares have returned -18.9% year to date, and while the price has recently moved into fair value range, we still find it attractive (shares +18% since June 1st). The current P/FFO is 17.7x vs. the normal (since recession) P/FFO of 18.4x - that’s a 4% discount to the 10-year P/FFO. The dividend yield is 4.8%, and given the low interest rate environment, we find that to be sound value.
Analysts now forecast O to grow by 5% in 2020, 2021, and 2022 - so the simple math suggests that investors could expect to see annualized returns of 10% annually (5% yield + 5% growth). Isn’t that what retirees want? A predictable income stream with steady price appreciation.
(Source: F.A.S.T. Graphs)
In Closing
In Why Moats Matter, the co-authors explain:
“These companies are able to withstand the relentless onslaught of competition for long stretches, and these are the wealth-compounding machines that we want to find and own."
They also suggest that “dividend-paying stocks have a history of outperforming nonpayers, and their high-yielding stocks usually outperform low-yielding ones, and it becomes clear that dividends aren’t just for over-the-hill companies or investors - dividends are for anyone interested in total return”.
My recent articles on:
- Omega Healthcare
- Realty Income
- W.P. Carey
Author's note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: written and distributed only to assist in research while providing a forum for second-level thinking.
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