Displaying items by tag: income
It might seem a bit counterintuitive right now, but that may be exactly why it is a good bet. REITs have been beaten up pretty badly, and on the surface they seem likely to stay that way. Offices, retail, and other parts of the commercial real estate world look to remain weak, but Citi’s private bank thinks there is value in the sector. As to their role in a portfolio, Citi says REITs “are a way to play the U.S. economic recovery and global economic recovery without being too concentrated in the Microsofts of the world, and to add to portfolio yield on top of that while we wait for that recovery”. REITs are yielding about 7% on average and the market has been so beat up that they look underpriced relative to the value of their underlying assets.
FINSUM: The key here is either broad long-term exposure, or shorter tactical exposure to sectors that don’t look likely to be hurt (e.g. industrials, which benefit from growth in ecommerce).
The market is split over dividend stocks. On the one hand, about half the market thinks the huge wave of dividend cuts are over and that most of the damage has been done. One the other, many worry that not all the deleterious effects of COVID have manifested themselves on corporate behavior and that further cuts may still be in the works. The overall picture seems to be one where caution is due given the big jump in valuations and the continued possibility of further cuts. For instance, bank and credit card companies look likely to cut further as high unemployment leads to worsening credit quality and more delinquency. Wells Fargo just announced a dividend cut, for instance.
FINSUM: Our thinking here is to be careful. Even if the economy does not have another lockdown, the full effects of this recession may take a little time to fully show themselves in dividend cuts.
For those interested in dividend investing, REITs have always been a key area. While rate sensitive, they can also provide strong and steady income streams. REITs may seem particularly risky as a whole right now because of the ongoing reckoning in commercial real estate as a result of the pandemic, but there are still some good opportunities to be had. The reason why is that REIT dividends, which have fallen 20% since the beginning of COVID, have likely hit their floor. JP Morgan says “that the current 3.5% dividend yield for the REIT group should be sustainable at this point.” Some of JPM’s best REIT picks right now include Brandywine Realty Trust (BDN, yielding 7.6%), Four Corners Property Trust (FCPT, 5.5%), Welltower (WELL, 5%), Medical Properties Trust (MPW, 6%), and W.P. Carey (WPC, 6.3%).
FINSUM: As obvious as it is to say, in our view, the key to REITs right now is the area of real estate they focus on. Mall REITS—probably not, storage/industrial RETS—much better.
Covered calls are an old investing methodology, but one that does not get much attention. That said, employing covered calls can be a great income strategy. So what is a covered call? Simply put, it is the process of selling call options while simultaneously holding the underlying shares. The idea is to earn income from selling the call options, while hedging risk by holding the underlying shares. The ideal outcome is that the underlying share price rises but does not hit its strike price, yielding the seller both the income from selling the option and the capital appreciation of the shares.
FINSUM: In markets with big momentum this is not a great strategy, but in back and forth ones like those at present, it can be very effective for increasing income. There are a number of funds that also employ this strategy so you don’t have to do it manually.
May was a rough month for dividend stocks. Many companies announced the suspension of dividends or at least a cut. However, 11 companies in the S&P 500 announced dividend increases. That is an interesting group to look at because it likely means their businesses are thriving. Ten of those are: Medtronic, PepsiCo, Clorox, Cardinal Health, Chubb, Expeditors International of Washington, Baxter International, Northrop Grumman, TE Connectivity, Ameriprise Financial.
FINSUM: Pepsi and Clorox are the most interesting of the bunch for us. Both are consumer staples and because of their unique positioning, both seem likely to thrive.