The S&P 500 has just made its biggest change in the past 20 years — and it could have huge implications for your portfolio. It will also give you the opportunity to load up on stocks that have been one of the unsung success stories of the past decade.
Let’s boil it down to the basics…
The S&P 500 was made up of 10 sectors:
But this month, the S&P 500 decided to break off a large chunk of the financials section and start an entirely new sector: real estate. It has made Real Estate Investment Trusts (REITs) its very own segment. The REIT sector will account for over 3% of the total S&P — bigger than both telecommunications and materials. This is a big deal…
REITs, however, are not well known to the bulk of the general investing public — and they aren’t as cut-and-dried as technology, commodities, or consumer goods.
Investors know that Apple sells electronics. They know that Johnson and Johnson sells soap and Band-Aids.
Folks are aware that Exxon sells oil and Pfizer sells pills…
But REITs are a bit more complicated. Do you know what EPR Properties (NYSE: EPR) sells? How about Sun Communities (NYSE: SUI)? Vornado Realty Trust (NYSE: VNO) anyone?
If the answer is a resounding NO, I don’t blame you. But now that they have been bestowed with their very own piece of the S&P, we could see huge inflows into them as investors try to catch on with what some of us have known for years: these stocks are some of the best investments you can make. Many of the larger REITs should become household names in the very near future. That’s why you need to act now…
Here’s a quick primer… and three stocks that will reap the biggest benefits.
REITs can best be described like this: you can become a de facto landlord for a portfolio of rental properties.
REITs are companies that own income-producing real estate — basically they charge rent to businesses. These businesses could be shopping malls, restaurants, apartment buildings, self storage facilities, hospitals — you name it.
But as a REIT investor, you don’t have to go through the hassle of actually having to collect rent, make repairs, or put up the huge capital it takes to make real estate investments happen.
You know, all the reasons that real estate investment scares investors away…
REITs make it easy: you simply buy a REIT stock or index fund, and let the “rent payments” come rolling in. That’s because REITs, by law, have to pay out 90% of income as dividends to shareholders. They are perhaps the largest dividend paying stocks out there.
While dividends on the average stock on the S&P averages around 2.11%, equity REITs average 3.61%. That’s a pretty solid dividend payout by any measure. But if you zero in on mortgage REITs, you are looking at an average dividend north of 10%.
I dare you to find a better dividend than that…
As a dividend investor, I rely on REITs for the healthiest, most consistent payouts. I collect juicy payments all year, regardless of what the broader market is doing.
NAREIT — the National Association of Real Estate Investment Trusts — just released a report detailing just how incredible REITs have been over the last couple of decades. Even without those massive dividends, REITs have almost doubled the S&P returns so far this year.
Equity and mortgage REITs have delivered a 14.18% total return while the S&P is sitting around 7.8%. According to the NAREIT report, equity REITs “have beaten the S&P 500 for the past three-, five, 10-, 15-, 20-, 25-, 30-, 35-, and 40-year periods.”
That is some serious cash that has been ignored by most investors. But that won’t be the case for long…
The new classification should increase awareness of these income superstars, and we could see a huge influx of REITs in pension funds, ETFs, and institutional investors.
“There is going to be more money looking at the sector,” according to Matthew Norris of real estate firm Grosvenor Group.
“This is going to bring real estate into focus.”
But you have a ton of options when it comes to REITs. You could settle for an ETF like the Vanguard REIT Index Fund ETF (NYSE: VNQ). It’s been solid, returning 68% over the last five years and handing out a nice 3% dividend. But investors have already started piling in to the tune of $4.6 billion this year. I’d rather place my bets on individual companies that payout far greater dividends and stand to triple their value over the next decade.
For my money, I’m banking on one real estate sector over all others…
I don’t have high hopes for shopping mall REITs. I’m not bullish on restaurants. These are both difficult businesses that are beholden to consumer trends. There is a lot of turnover and vacancies — which are kryptonite to REITs.
I like to bet on the sure thing…
There is nothing more certain than people getting old. And Americans are getting older at a pace that the world has never seen.
Every year, over 3.6 million baby boomers are retiring.
To put that in perspective, that’s 10,000 people every single day
By 2060, 92 million Americans (20% of the population) will be 65 or older.
Seventy percent of the disposable income in the U.S. is in their hands. They drive at least $7.1 trillion in annual economic activity.
That’s around 46% of the entire U.S. economy.
As far as REIT investing goes, there is only one place you need to be looking if you want guaranteed income and triple-digit returns: health care REITs.
Retirement communities, senior apartments, assisted living, and all sorts of real estate associated with this demographic are sprouting all over the country. But supply of these properties is still extremely low. Demand will only rise as more Americans age.
You see, the current growth rate of senior housing units is just 21,950 units per year. To keep up with demand, 60,000 units per year are needed.
In other words, a 173% increase per year is required to even meet the demand, which is projected to peak in 2044.
Until that peak, here are three health care REITs that will pad your retirement portfolio for decades to come…
