Marketplace Roundtable – Part 5 – Divdidends, REITs, And Income

~ By Tim Murphy, Marketplace Success Manager

Thank you to all readers of the Mid Year Marketplace Roundtable Series. So far we’ve covered Macro, Value Stocks, Commodities, and Growth/Tech/Crypto. Today we continue with Dividends, REITs, and Income analysis.

Once again, the questions we asked were:

1. What are your major takeaways of your area of coverage so far this year? What are you looking for and expecting for the rest of 2022?

2. What’s one favorite idea for the rest of 2022, and what’s the story?

Enjoy reading! We’d love to hear your thoughts and own ideas in the comment section below. Links to the author profile page and their Marketplace service are included. All services have either a two-week free trial or a limited one-month money-back guarantee.

*Note for non-Premium readers: Author blogs and articles from this account, SA Marketplace, are not paywalled.

Dane Bowler of Portfolio Income Solutions: REITs are increasingly well positioned in terms of forward returns as prices have come down considerably and earnings (FFO or AFFO depending on the REIT) have come up considerably. The net result is a substantially higher going in cash flow yield.

I believe the downdraft in REITs to be mispricing predicated on assumptions about REITs that have not been updated for their current form. Heading into the financial crisis REITs operated at high levels of debt and much of it was short term or floating rate in nature. Perhaps this is the origin of REIT’s reputation as an interest rate sensitive instrument.

Today, however, REIT debt levels have come down significantly and only a tiny fraction of REIT debt is floating rate. Further, most REITs took advantage of the recent zero interest rate environment to term out cheap fixed rate debt for the long term. The feared rise in interest expense will not manifest in any material way giving rise to higher than expected earnings.

IDEA: STAG Industrial (STAG) is trading like a value stock but has impressive growth potential with rents that are about 20% below market. As leases roll over, STAG has the opportunity to renew at much higher rates resulting in organic growth to FFO/share.

Industrial REITs have been a desired sector of the market with the average trading at 23.7X forward FFO, but STAG has fallen through the cracks and can be bought for just under 15X forward FFO.

Organic leasing rate growth is to be supplemented by a robust acquisition pipeline in which STAG sources acquisitions at cap rates around 6% which significantly exceeds its cost of capital. I see FFO/share growth in the high single digits or low double digits annually for the next 5 years. At 15X FFO, that level of growth is not being priced into the stock.

Disclosure: Long STAG

ADS Analytics of Systematic Income: Our major takeaway and something we have talked about repeatedly over 2021 is that the income space was in a precarious position last year and, in effect, priced for perfection. CEF discounts were trading at historically expensive levels, high-yield corporate bond yields were at historically low levels while equity valuations were very elevated as well. Needless to say, we are in a very different place now with many income sectors down 20-25% year-to-date.

The reality is that income markets are highly mean reverting and the feast of 2021 has now been followed by a famine. Investors who have pursued a countercyclical approach to income investing – bulletproofing their portfolios by moving to more resilient securities last year and diversifying – have not only done much better overall this year but are also in a much stronger position to take advantage of the recent dislocation.

IDEA: Naturally, different investors will tend to have a different level of risk appetite. For investors looking for higher-yielding opportunities in the current market we continue to like the Carlyle Secured Lending (CGBD). CGBD is a Business Development Company and makes secured loans to middle-market companies. CGBD will continue to benefit from rising short-term rates given its assets are primarily floating-rate. It features a 12.5% total dividend yield and trades at a 25% discount to book value. CGBD has generated a double-digit total NAV return for investors over the last three years.

Disclosure: Long CGBD

Nick Ackerman of Cash Builder Opportunities: My main takeaway is that investing in dividend growth stocks works in good and bad times. Particularly well in bad times as cash continues to flow in. Our Core Portfolio names have been holding up relatively well compared to the broader market. Holding leaders in each respective industry primarily with strong histories of dividend growth tends to keep portfolios more stable.

I would suspect that the remainder of the year continues to be volatile as long as interest rate increases remain the center of attention. Come what may, the reliable dividend growers will keep boosting, though. That will continue to allow investors to sleep better at night in this area of the market.

IDEA: A favorite idea is Starbucks (SBUX) through the remainder of the year. It has been incredibly beaten down, but China won’t be in lockdown forever. I also suspect it will remain a cash-generating machine despite all the unionization. Howard Schultz is back as the interim CEO to right the ship once again.

Disclosure: Long SBUX

Fred Piard of Quantitative Risk & Value: Dividend-oriented strategies have resisted better than major indexes in 2022, regardless of quality. I think quality will become more important. The equity risk premium, an indicator of stock attractiveness, went down below long-term averages. Moving to quality stocks now is a factor of risk reduction. QRV Stability, a 14-stock model picking high quality dividend stocks, is designed for all market conditions. I also think volatility may create opportunities in closed-end funds. My Best Ranked CEFs and Real Estate Rotation, two rotational models holding closed-end-funds positions for a few weeks to a few months, have beaten their respective benchmarks in 2022, and so did QRV Stability*. The absolute value of beating a benchmark depends on what the benchmark does. I don’t try to predict that. I evaluate risks and manage exposure accordingly.

* Calculation on 6/17. Past performance is not a guarantee of future return.

IDEA: My largest position as of writing is in the Cohen & Steers Total Return Realty Fund (RFI). My strategies are rotational by nature, so this position may have changed when you read this. However, I think RFI is a good long-term investment for income-seeking investors, with the condition not to buy it at an excessive premium to net asset value.

Disclosure: Long RFI

Fredrik Arnold of The Dividend Dog Catcher: Dividend Stocks, BDCs, and REITS are safer harbors in the maelstrom of market volatility. This fact was confirmed during the Covid lock downs, the 2020 Ides of March crash, and now in the early days of inflation nation.

IDEA: As an indicator of the relative strength of the five small dogs of the Dow Industrials Index, keep a watchful eye on Dow Inc (DOW). As Dow’s price drops from the high $60’s to $52.90 it will reach the “sweet spot.” That’s the point where DOW share price becomes equal to the dividend realized from a $1,000.00 investment.

Disclosure: None

Blue Harbinger from Big Dividends PLUS: You already know the story. Inflation is soaring and the Fed is hiking rates aggressively to fight it. In the process, they’re slowing the economy and driving stock prices down. The flip side of this is that as many stock prices go down, yields mathematically go up. As an income-focused investor, the trick is recognizing if the economic environment is doing permanent damage to higher-yielding stocks whereby their prices won’t necessarily immediately rebound to their prior highs once the smoke clears, or if they are increasingly attractive and worth considering for investment.

IDEA: Main Street Capital (MAIN) is an attractive BDC that offers financing to smaller middle market businesses. The business is currently attractive for a variety of reasons, including its large dividend, lower price-to-book value (relative to its own history) internal management team, and well-run long-term business.

And one of the things that is particularly attractive about BDCs right now is that a lot of them are set to actually benefit from higher interest rates (i.e. they earn higher net interest margins, especially related to their mostly fixed rate balance sheet debts versus the floating rates they receive on the loans they’ve made), but these benefits won’t start to kick in until the second half of this year because of where they set average portfolio investment floors of around 1%. We are currently long shares of MAIN, and we recently ranked it on our list of Top 10 Big Dividends blog post.

Disclosure: Long MAIN