Golden Ticket (Photo by SGranitz/WireImage) *** Local Caption ***
Long ago, in a fantasy familiar to many, a boy named Charlie met a chocolate factory owner named Willy across a book, two movies, and many actual candies. Given my fondness of the original 1971 movie, and secondarily of the Johnny Depp remake (13 years ago this week), is an image (and forthcoming analogy) I cannot shake - that of the Everlasting Gobstopper.
Here’s a quick recap from Gene Wilder’s Wonka:
“Everlasting Gobstoppers! They're completely new! I am inventing them for children who are given very little pocket money. You can put an Everlasting Gobstopper in your mouth and you can suck it and suck it and suck it and suck it and it will never get any smaller!... There's one of them being tested this very moment in the Testing Room next door. An Oompa-Loompa is sucking it. He's been sucking it for very nearly a year now without stopping, and it's still just as good as ever!”
Now, your humble REIT analyst offers this profound analogy: the “Everlasting Gobstopper” is very much like the "everlasting REIT dividend.” The attractive value proposition for both of these appetizing products is that they’re highly sustainable and never change over time.
Looking for the Prize
As most intelligent investors know, we’re looking for securities with a significant margin of safety, with a "favorable difference between price on the one hand and indicated or appraised value on the other.” (Graham)
Once we reach retirement, investing becomes all about income and safety. Yet over the years one of the greatest laments of the retiree is the struggle associated with living on a fixed income.
Retirees have been conditioned to the notion that once they reach retirement age they must become completely risk-averse regarding their investing practices. Therefore, they end up holding portfolios full of fixed income with little or no growth of either income or principal.
Yet, it doesn't have to be that way. Retirees can have their cake and eat it too. If they adhere to sound principles of investing, they can have safety, growth, and an increasing income each year.
Most readers know I focus on the strong, reliable, high dividend equity REITs (and some commercial mortgage REITs), as a "core" asset selection - not just an alternative.
The “intelligent investor”, Ben Graham, believed that the conservative investor should only consider companies that have paid a dividend every year for at least the last 20 consecutive years. He believed that dividends represented a strong proxy for profitability since they are paid from earnings, and he liked the idea that they offered investors a return even when the company's stock price was not cooperating.
Thus, the opportunity to invest in blue-chip Dividend Champions at sensible valuations provide a level of safety and performance that is suitable for retirees.
And the Best Part:
Ben Graham liked dividends and considered the durable income stream a filtering mechanism for companies demonstrating "consistency and durability (as) attributes for competitive advantage.
More from Graham’s sentiment on dividends, from The Intelligent Investor:
“Paying out a dividend does not guarantee great results, but it does improve the return of the typical stock by yanking at least some cash out of the manager's hands before they squander it or squirrel it away.”
The Really Really Good Part
REIT investors don't have to guess whether the manager’s paying or not, because REITs by law must pay out at least 90% of cash flow in the form of dividends. As Ben Graham intimated, companies that have a long legacy of paying a dividend, and in this case even increasing it, are indicative of healthy and strong profitable enterprises.
Golden Tickets
In my newsletter, the Forbes Real Estate Investor, I research and rate over 125 REITs and each company is screened for various metrics, and the highest quality REITs are referred to as SWANs (stands for “sleeping well at night”).
Accordingly, there are nine REITs that have demonstrated exceptional track records for paying and increasing dividends. Keep in mind these nine REITs stuck it out through one of the worst economic downturns - the Great Recession (a financial collapse paralleled only by the Great Depression), which saw the end of Lehman Bros and Bear Sterns, and a near-collapse of Citigroup and AIG.
So while financial markets were in utter turmoil, and there was no certainty any REIT would have access to capital, let alone pay and increase dividends, these worthy nine stood the test of time:
Federal Realty (NYSE:FRT), Universal Health Trust (NYSE:UHT), National Retail Properties (NYSE:NNN), Tanger Factory Outlets (NYSE:SKT), Realty Income (NYSE:O), Urstadt Biddle Properties (NYSE:UBA), Essex Property Trust (NYSE:ESS), W.P. Carey (NYSE:WPC), and National Health Investors (NYSE:NHI).
The "promise for safety of principal and satisfactory return" are essential to meeting an investor's objective to maximize total returns.
I accept the fact that a stock's value must be determined through a methodical analysis of a security and that’s the central task of the Graham-inspired value investor model.
Yes, there are some quality income streams from "blue chip" REITs with premium pricing, but I argue you should not pay any price.
And I especially seek out REITs that have superior management teams, to help form the mark of a "sleep well at night" investment.
It's also critical for any investor, as part of due diligence, to compare the returns of REIT stocks, with non-REIT stocks and other fixed-income instruments. When you consider macro-level economics, it’s plain to see how REITs are undervalued - especially given their historical relationship with investment-grade and high-yield bonds.
You’re the Winner!
Dividends provide a compelling feature (not just for retirees) – and especially for REIT investors – receiving increasing dividends from solid companies with compounding performance that delivers impressive investment returns.
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I own shares in SKT, O, UBA, WPC, FRT, and NNN.
