Dividend stocks (and even REITs) were having a great 2013 until May 22nd. The Dow Jones Composite All REIT index was up 16%, but then it all came crashing down. Was it justified for REITs to crash because of taper tantrum?
During May's Federal Open Market Committee meeting, Fed Chairman Ben Bernanke made comments suggesting that the Fed's QE (Quantitative Easing) could be reduced in the near future. Investors, judging by the REIT Index's reaction, assumed tapering would be accomplished through a combination of interest rate hikes and other means that would hurt REITs.
In the last seven months, the Dow Jones Composite All REIT index lost 16%, erasing all gains from the first part of 2013. As aforementioned, REITs would be hardest hit by the interest rate hike that investors think is imminent. I don't believe more interest rate jumps are on the way. Janet Yellen, who will become the new Federal Reserve chairperson this February, said she supports "lower for longer (interest rates)."
Two REITs for 2014
National Retail Properties (NYSE:NNN) is a triple-net lease mortgage REIT. "Triple net" means the tenant of the property is responsible for insurance, maintenance, and property taxes. That means if anything goes wrong on the property (e.g., sewage issues), the tenant is responsible for fixing it.
The triple-net lease structure ensures National Retail can have very stable income because it shifts many of the risks associated with owning property onto the occupant. National Retail Properties currently has a 98% occupancy rate for its properties. It also yields 5% and has increased its dividend 24 years in a row.
In National Retail Properties' third-quarter earnings report, CEO Craig Macnab stressed that the company was avoiding investing in any properties that do not have contractual rental growth.
Macnab also highlighted that National Retail Properties invested $90 million to acquire 35 more properties with an initial cash yield of approximately 7.7%. When the rental growth from these properties kicks in, it will receive an average yield from these acquisitions approaching 9%. National Retail Properties' strong management and balance sheet make it a great investment opportunity.
Realty Income Corp (NYSE:O) owns properties in the United States and Puerto Rico. It's also engaged in the triple-net lease industry. Realty Income has negotiated rent increases on most of its properties to ensure the company has room to increase dividends.
The "taper tantrum" caused REITs to take a plunge in 2013. Now that 2014 is here, it's a great time for investors to pick them up on the cheap. REITs give investors an easy way to get exposure to the real estate market while still remaining liquid.