Three Rs for Risk Control: Retirement, Recession and REITs
Recognizing interest rate risk is essential to intelligent REIT investing and especially when one is considering an alternative that has considerable debt and use of leverage. Before you go out and buy mortgage REITs for their high yields, keep in mind that these investments are very risky.
Unlike other types of dividend-paying companies that pay the same dividend each quarter, the dividends paid by mortgage REITs are very unstable and are cut often -- sometimes drastically -- when interest rates and/or mortgage defaults rise or the yield curve flattens.
Let's Focus on the Right REITs
Now, I'm not forecasting the next recession. But what I can forecast are the best REITs for a recession-proof dividend portfolio. Namely, I like the health-care REITs, the triple-net REITs, the self-storage REITs and select shopping center REITs. Let me tell you why.
Due to the fact that health care is a needs-based industry, economic cycles have little effect on demand. As the U.S. population ages and life expectancy increases, demand for assisted living and skilled nursing facilities is expected to grow.
Another choice sector is the triple-net sector. Although the stand-alone class does not have the growth of the apartment and hospitality sectors, the contractually long-term leases make the triple-net sector more durable and dependable. In fact, during the Great Recession, three triple-net REITs not only paid dividends but all three of them actually increased.
Another sector I really like is self-storage. This is not a sexy sector and in fact it's downright boring. But remember, we Americans store stuff. Lots of it. The average house size today is getting smaller and there isn't enough room to store grannies armoire or Uncle Bob's treasure trunk.
One of my favorite picks is Extra Space Storage (EXR) . This Salt Lake City REIT has around 720 storage properties and it due to the highly fragmented component of the storage industry, Extra Space has plenty of room to grow its brand.