The broader market has fallen prey to a bear, with the S&P 500 index dropping by as much as 20% from its recent peak in 2022. It is hard to watch stocks fall, since it generally means your net worth is declining. That's why I focus more attention on dividends than I do on stock prices.
And if you like dividends, as I do, one of the best places to find them is in real estate investment trusts (REITs). Here are three reasons why, even as the market plunges, I continue to love my REITs.
1. A mental diversion
A stock price is nothing more than a number that goes up and down in an often irrational manner all day long. If you pay too much attention to stock prices, you will give yourself an upset stomach. They can't be predicted over short periods, and the gyrations really don't hold all that much informational value, in my opinion.
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This is why I prefer to pay attention to dividends, which represent a tangible return on my investment. REITs have to pay out 90% of their taxable income to retain REIT status and avoid corporate-level taxes. They are dividend machines.
When I track my portfolio through the month, I'm really just counting the dollars that I've been paid in dividends (like a mini-Midas, I suppose). Dividends tend to be fairly stable over time, so it isn't particularly exciting.
I do dividend reinvest, so I'm happy to collect a few more dollars with each new quarter. And in the rare situation where there is a dividend cut, I know that I have some research to do. (In fairness to myself, I monitor company performance quarterly, so I'm usually aware of the risk of a cut before one takes place.)
The point is, I'm not watching the value of my holdings on a day-to-day basis, so the ups and downs of the market don't get to me. And that helps me stay invested through both bull and bear markets.
2. A basic business
While the dividend-focused nature of REITs fits well with my dividend-focused investment approach, that's not the only reason I like them. Another big factor is that I understand the REIT business model. REITs I own, like W.P. Carey (WPC 2.85%), Realty Income, Simon Property Group, and Federal Realty (FRT 1.26%), own properties and lease them out to tenants. It's not rocket science.
There are basic factors that you need to understand, like occupancy (how much of the portfolio is rented out) and property type dynamics (malls are different from shopping centers, which are different from stand-alone retail properties, for example), among others. But those are not hard to get a handle on. In fact, listen to a single conference call from a REIT you are watching and you'll probably understand the basics of the business. Simple is good in my investing world, and REITs are pretty simple.
All that said, don't underestimate the value of that when the world around you is getting increasingly complicated. This last bull/bear cycle has been particularly interesting on this front, given the rise (and now fall) of things like meme stocks, blank check companies, and companies that seemed hot during the early days of the pandemic but have since imploded as pandemic-driven demand for their services ebbs.
3. The dividend safety net
I'm not retired yet, but my end goal is to reinvest dividends until I'm ready to retire. Then I can turn on the income stream and live off of my dividends, leaving my savings untouched. With REITs like Realty Income and Federal Realty falling into the Dividend Aristocrat and Dividend King categories, respectively (W.P. Carey is on the verge of being an Aristocrat), I'm confident I'll have a reliable base of passive income.
This concept is not an unusual approach at all, but it comes with another little benefit that most people don't consider. In the worst-case scenario, the income I'm generating from dividend-paying stocks like REITs can be used to pay my bills today -- if I need to. That's not ideal, of course, but if I were suddenly to be out of work, I know that I have income that I can rely on.
So REITs are a bit part of that safety net for me, given that they tend to pay out material dividends. That said, there are negatives to REIT income, in that you have to pay taxes on REIT dividends as if it were earned income. But I'm OK with that, given that REIT dividends avoid corporate-level taxes. And if I need the income? Well, I'll just be happy to have quarterly (or monthly, in the case of Realty Income) dividend checks coming in during a rough patch in my life.
4. Some REIT names I like
My favorite REIT is probably W.P. Carey. It has a diversified portfolio, spread across the industrial, warehouse, office, retail, and self storage sectors. On top of that, around 37% of rents come from outside the United States. And it has increased its dividend every year since its initial public offing in 1998. It is as close to a one-stop-shop REIT as you can get in my opinion.
Another name worth a deep dive for dividend lovers like me is Federal Realty. The REIT owns strip malls and mixed use developments. It focuses on owning well positioned assets in highly desirable markets, opting for quality over quantity in a portfolio with just around 100 properties. Development and redevelopment are key focus areas, as it looks to keep its portfolio relevant with lessees and consumers. That said, Federal Realty's claim to fame is that, at 54 years and counting, this Dividend King has the longest streak of annual dividend increases in the REIT sector.
An investment for a bear market or not
The big takeaway here, however, is that buying REITs is not a bear market tactic for me. It is simply a core part of my long-term, dividend-focused investment approach. The REIT dividends I collect help me muddle through hard times, both emotionally and financially. They are as close to a perfect investment vehicle as I can probably find on Wall Street. This is why I buy them in both bull markets and bear markets -- and why you might want to as well.
