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Market Wrap-up for May 7 - Aristocrat REITs on Sale

Stoyan Bojinov May 07, 2015


Fed Chair Janet Yellen spooked the markets yesterday after she gave investors more reasons to take profits following her comments regarding stock market valuations.


“I would highlight that equity market valuations at this point generally are quite high,” stated Yellen. She even went onto add that, “There are potential dangers there.” This in turn sparked a round of selling across Wall Street as investors took these words of caution to heart.


Bargain Shopping for High-Quality REITs


Amid the selling, REITs in particular were hit hard. Investors dumped this asset fearing that over-stretched valuations and rising rates on the horizon would combine to make the “perfect storm” for these generally high-yielding securities. This, of course, was an over-exaggerated reaction for two reasons:

  1. Equities perform surprisingly well following interest rate hikes – see: What Really Happens When Rates Rise
  2. REITs in particular have delivered stellar returns even during rising-rate environments – see: Interest Rates & REIT Performance

As such, we view the pullback seen over the past month across real estate investment trust securities as an opportunity in disguise. In an effort to avoid falling into a high-yield trap, we recommend investors start formulating their REIT shopping list by first considering only the most stable securities from this corner of the market.

Below, we’ve picked out REITs that also happen to be Dividend Aristocrats. Put another way, these securities have been growing their dividend annually for at least 25 consecutive years.

Federal Realty Investment Trust (FRT ): This company is down nearly 9% over the past month but has grown its dividend for nearly a half-century (47 years).
HCP Inc. (HCP ): This company has lost upwards of 11% over the past month but has grown its dividend for 29 consecutive years.
Universal Health Realty Income Trust (UHT ): This is the biggest loser from the list, having shed nearly 15% over the past month, though the company has raised its dividend for 29 consecutive years.


The Bottom Line


Yellen is right — valuations across the domestic equity market appear to be a little inflated. However, that doesn’t mean there aren’t opportunities for income-focused investors to put their cash to work. By focusing on high-quality REITs with a proven track record, investors can tap into a growing dividend stream without taking on excessive risk and “reaching” for yield, so to say.

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