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#1 Dividend Stocks on Sale

Written by Briton Ryle
Posted November 16, 2016 at 7:35PM

The most powerful and reliable dividend stocks are on sale right now. These stocks exist for one reason: to pay large dividends to their shareholders. This group of income stocks is so solid that it was just given its own sector within the S&P 500, right along with Financials, Technology, and so on. 

The new sector is now called Real Estate. But that name is a little misleading. Because these aren't traditional real estate companies, like homebuilders or developers. Instead, these companies own different types of real estate assets and rent them to tenants. It could be shopping malls or office buildings, hospitals or apartments. Some of these real estate companies even own farmland that they lease to farmers.

Over the last couple of years, the best performing members of this special group of real estate stocks have been the ones that own data centers and then lease space to companies that do business on the Internet. And these days, pretty much every company has a website and uses the Internet to business, so you can imagine that they've done pretty well. 

As different as these companies can be, they have all one thing in common: so long as they pay out +90% of their earnings as dividends, they pay no corporate income tax. Zero, zilch, nada. 

It's a pretty sweet deal, because not paying corporate income tax means they have even more money to pay out as dividends. So it's no wonder these companies typically have dividend yields of 5% and 6%. And there are some with yields as high as 10% to 15%.

These special dividend stocks are called real estate investment trusts, or REITs. They are terrific investments for anyone planning for retirement or who needs income in retirement. And like I said at the start, they are on sale right now...

REITs on Sale 

As a group, REITs are down about 12% since the beginning of August. Here's the six-month chart...

iyr 6 month

Now, the idea that you might get a 12% rally for these stocks is nice. That's a decent gain. But it's probably not good enough to get you foaming at the mouth over all the money you're going to make. I get that. Really, I do. So let's have a look at a three-year chart...

iyr 3 yr

There. That looks a bit more enticing. The simple fact is, REITs have been among the best investments you could have made over the last three, five, or 10 years. In fact, check out the returns for the Top 10 Holdings of the Real Estate Select Sector SPDR ETF: 

reit %

27%, 22% 17%, 17% — those are all fantastic one-year returns. And when you consider that they don't include dividend payments, then these stocks have done even better. Just tack another 3%–6% to those gains.

Also, right at the top of that list sits Digital Realty, up 27% in the last year. That's one of those data center REITs I mentioned earlier. As one of the biggest data center REITs out there, it has done very well. But it's not the best of its class. Over the last five years, it's up just 45%. My top pick in this space — the one I recommended to my Wealth Advisory subscribers — is up 266% over the last five years. And right now, it is nearly 30% off its recent highs. That means a 50% move is likely in the near future...

Why Are REITs Down?

I'm not going to sit here and blow smoke about what a great opportunity REITs are and just ignore why they are down since August. Anybody who will only tell you half the story does not have your interests at heart. 

REITs have traded lower because of interest rates. On the Fed side of the equation, it was in August that the Fed got serious about giving us another rate hike this year. That's seen as an issue for REITs because REITs use bonds to raise money for new acquisitions, like new farmland or malls or whatever. (For the record, I am not a big fan of shopping mall REITs. There's too much competition from the Internet.) That's how they grow. 

So the logic is that if REITs have to pay more in interest payments on the bonds they sell, then they have less money left over for dividends. That logic is actually sound. But it's also misleading. Because REITs can sell stock to raise money, too. And all REITs have inflation clauses in the lease agreements they sign with tenants that allow them to raise rents in line with inflation. In other words, they can offset increases in borrowing costs with higher rent payments. 

So, the fact that the Fed may hike rates a few more times over the next couple of years really should have very little impact on REITs or their generous dividends.  

Interest rates on Treasury bonds are also an issue for REITs. In a way, all dividend stocks compete with bonds. When 10-year Treasury bonds pay 2% a year, it makes sense for investors to take on a little more risk and buy a stock that pays a 3% or 4% dividend. After all, that's 50% more income. But if the 10-year is paying 3%, then there is much less incentive to take on the additional risk of stocks. 

Now, I'm not trying to scare you off REITs. I just think it's important you get the whole picture. 

Personally, I think the selling in REITs is just about done. The stocks have come down and look really attractive. My most recent REIT recommendation to my Wealth Advisory subscribers is a really unique operation. It's a bit of a hybrid, combining some data center, some cell tower, and some fiber optics. And it pays a fantastic 9% dividend that is completely covered by long-term contracts.

This REIT is currently trading around $24. It's been as high as $42, and I have a $40 price target on it. Click here to learn more.

Until next time,

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Briton Ryle

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An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.

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