The Fed's Profit Invitation
You're probably well aware that the Fed decided not to hike interest rates at its latest meeting last week (March 17). But the reasons — and the outlook for interest rates for the rest of this year — tell you exactly where you can make the most money:
The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will continue to strengthen. However, global economic and financial developments continue to pose risks. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of declines in energy and import prices dissipate and the labor market strengthens further. The Committee continues to monitor inflation developments closely.
Nice of them, isn't it?
Well, not only that, but the Fed also releases a "dot plot" as part of its Summary of Economic Projections. The "dot plot" is meant to show us where interest rates will be a year from now, without actually coming right out and telling us. Instead, each regional Fed president (there are 17) gets to anonymously mark the interest rate level they expect to see — with a dot.
Yeah, the idea of a "dot plot" sounds more like a kindergarten art project than an interest rate forecast from some of America's foremost economists, but whatever, I'm not here to judge.
The point is, the Fed is sending a strong message to investors.
In December, more Fed members put their dots on 1.25 than any other number. But last week, there were more dots on 0.75 than any other number. And one dot mysteriously showed up on 0.5.
What this means is that back in December, most Fed members thought there would be four rate hikes in 2016, pushing the rate up to 1.25. Now, most Fed members think there will only be two more hikes. And one member thinks there will only be one.
That's a pretty significant change for interest rate expectations. But it's causing an even more significant change for one group of stocks...
What to Buy Now (and Hold Forever)
Stocks have done pretty well since the market bottomed on February 11, 2016. Popular stocks have rallied, like Apple, which jumped around 13%, from $93 to $106. Cisco has jumped 16%, from $24 to $28. Starbucks is up 11%, from $54 to around $60 a share.
But there's one group of less popular dividend stocks that have blown these performance numbers out of the water. As a group, they've jumped 18% since February 11. And as a group, they yield a little better than 4% a year. If these stocks did nothing for the rest of the year, they'd return a rock-solid 22% to investors.
The stocks I'm talking about are real estate investment trusts, or REITs.
If you don't know, a REIT is special kind of corporation that exists for the sole purpose of paying dividends to its shareholders. In a general sense, REITs own real estate and lease it to other companies, and the rental income is distributed to their shareholders as dividends.
So long as a REIT distributes 90% of its income to shareholders, it doesn't have to pay taxes. It's a pretty sweet setup.
What's more, REITs tend to have long leases (+10 years) with their tenants that have inflation hikes built in, so revenues and dividends are very stable and predictable.
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It contains full details on why dividends are an amazing tool for growing your wealth.
That's why REITs are a favorite investment for investors that want steady income, like retirees. That's also why a lot of investors think REITs are boring and don't move much. But the moves some of these stocks have made over the last six weeks are anything but boring...
This chart is for one of my favorite REITs, Omega Healthcare (NYSE: OHI). The company owns long-term health care facilities, so it's a good play on the aging of the baby boomers. But check out that chart!
OHI is up 25% since February. And even after that run, it still pays a huge 6.5% dividend. Total annual returns since February 11 will probably be well over 30%. And if it gets anywhere near its 52-week highs at $42, well, total returns will be over 50%. Not bad at all for a safe, boring stock...
I've had this stock in my Wealth Advisory dividend and income newsletter for a few years now, and there's plenty of upside in the years to come. Here's another one you might like:
That's Tanger Factory Outlets (NYSE: SKT). It owns factory outlets around the country that are doing very well, even as most shopping malls struggle. This beauty is up a cool 20% since February 11, and it pays a solid 3% dividend. My Wealth Advisory subscribers have already bought and sold the stock once for a sweet 37% gain. And we bought it again in September 2015 to have another go at it...
But let me tell you why these "boring" stocks have done so well and why they will continue to outperform...
The Fed Wants You to Buy REITs
REITs are often perceived as interest rate-sensitive stocks, because they compete with Treasury bonds for income investors' money. If you can get 5% from a T-bill, you may not choose to invest in a REIT.
So as investors figured out that the Fed wasn't going to hike interest rates, a lot of investors sold their bonds and bought REITs. This is known as the "search for yield," and it helped make REITs among the best-performing stocks between 2010 and 2014.
And now the Fed is telling investors that it's time to buy REITs again. These stocks are already beating the market over the last six weeks. And I will bet dollars to donuts that trend continues for the remainder of 2016.
Until next time,
Until next time,
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.