Monday, September 25^th, 2023

Multiple Reasons Why REITs Will Soar in 2024

Over the last few days, not one (1) but three (3) signals indicate “NOW” is a opportune time to consider Real Estate Investment Trust(s) REITs.

That means it’s finally time to start selectively considering these “INCOME” plays. I’ll name two (2) with dividends on multi-year growth runs below.

Tickers in a sec…

First, let’s talk timing... Here’s why REITs are jumping up my dividend priority list now:

• They haven’t followed stocks higher in ’23—so our “LANDLORDS,” which own everything from shopping malls to warehouses, apartment buildings and cellphone towers, are CHEAP in relation to the popular kids of the S&P 500. So …
• Their yields are (still) HIStorically high, at around 4.6%, the average REIT pays more than triple the 1.5% the typical S&P 500 stock dribbles out, plus …
• We’re rolling into “STOCK SEASON"!!!

Another green light, that is indicating consideration is in order for the purchase of REITs, is coming from an unexpected place… rising TREASURY YIELDS”.

As I write this, the 10-year Treasury yield is bumping its head on the 4.3% ceiling that it’s bounced off of repeatedly in the last year (2022).

Each time has been a great opportunity to “BUY” BONDS because BOND prices RISE as yields FALL. Well, select REITs should do even better. Over the short run, REITs trade like BONDS. They DECLINE when rates RISE—and RISE when rates DECLINE.

BUT, a good REIT beats a great BOND. REITs are actual businesses that can grow cash flows simply by increasing their rents. Which means, not only are their prices low today, but they have more room for gains than a BOND fund.

By the way, we shouldn’t go further without tipping our caps to Uncle Sam, whom we can thank for REITs’ high yields: the government gives REITs a “HALL PASS” on corporate taxes so long as they pay 90% of their income as dividends. The resulting savings—and the fact that this hoard must be passed to us—drive those BIG dividends, and often fast dividend growth, too.

So if you like a FAT yield and a dividend that soars every year (and sometimes quarterly), REIT-land is the place for you.

A rising dividend is the No. 1 driver of share prices. Take a look at this dividend action on warehouse REIT First Industrial Realty Trust (FR).

Heck, maybe in the case of FR we should call it a “DIVIDEND FORKLIFT!!!”

That’s the payout and price action on First Industrial Realty Trust (FR) in the last 10 years. FR owns 444 industrial properties across the US, with a focus on the coasts.

FR’s dividend went a bit flat in the mid-teens. But it’s been sprightlier lately, pulling up the price. The stock now lags the dividend—and it tends to “catch up” over time.

These days, FR’s catching a tailwind from “ONSHORING,” or US and multinational companies shifting their operations to the US and away from basket cases like China.

Every month, it seems, we’re reading about a new factory opening in America, and all that hammering, welding and assembling happening here has cranked up demand at FR’s warehouses: in the second quarter, occupancy was 97.7%. The company also renewed or initiated 43 new leases in the quarter at an average rent increase of an eye-popping 74%.

So it’s no wonder management boosted guidance to $2.35 to $2.43 in funds from operations (FFO, the key profitability metric for REITs like FR) for all of 2023. The dividend occupies just 53% of the midpoint of that range, so it’s plenty safe.

With onshoring still surging, warehouses in the right spots to capitalize, FFO rising and long rates looking toppy, FR’s shares—and payout—could catch a lift from here.

A 4.1%-Paying Residential REIT With a Tech Edge

Now let’s flip to the residential side, specifically to Essex Property Trust (ESS), owner of more than 62,000 apartment units in California and Washington State. It’s an indirect play on three (3) trends sweeping its tech-powered markets:

• Surging AI investment, driving a rebound in venture-capital funding in the Bay Area, following a tough (to put it mildly!) 2022.
• Ongoing high mortgage rates, which are pushing more buyers out of the market—and into Essex’s rentals, supporting the REIT’s 96.6% occupancy rate.
• The (partial) return to the office,

Those forces are driving Essex’s FFO—and dividend—higher. HIStory is also on our side with this 4.1%-payer, which has been hiking its payout annually for 29 straight years.

Over the last decade, Essex’s share price has steadily track its payout higher, up till the washout of 2022, from which Essex—and REITs generally—have yet to recover. That’s the upside with this West Coast apartment maven:

There’s more here, too…Essex is paying a weighted average interest rate of just 3.3%!!! If you’ve ever wondered if big companies are getting a better debt deal than YOU, ME, WE the ATWWI FAMILY, well… there it is. With just under 7% of its debt maturing by the end of 2024, when rates are expected to be on the downslope, Essex is in a nice spot indeed.

The kicker: the REIT saw same-property revenues rise 4% in Q2, far more than its interest payments. Meantime, operating expenses actually fell—it’s been a while since we have seen that!!!—to the tune of 1.2%.

Finally, the dividend is “SAFE”, with management boosting the midpoint of forecast 2023 core FFO to $15.00, and the annualized quarterly payout accounting for a comfortable (for a REIT) 61% of that.

PEACE & BLESSINGS
Kenneth Reaves, Ph.D.

Friday, September 22^nd, 2023

We Have Entered Into A “FAVORABLE” BOND Economy

Investors often think the market is too hot or too cold to put new money to WORK.

You can always find a reason not to invest. However, there’s a way you can invest your cash, earn interest and not worry about losing money.

BONDS!!!

Notice I didn’t include the word “FUNDS” after. Like Elvis and the hound dog, BOND FUNDS are “no friend of mine”. I’m not a fan…

If you invest in a BOND FUND and rates go higher, you are nearly guaranteed to LOSE money because BOND PRICES FALL AS INTEREST RATES RISE!!! As a result, the value of the BOND FUND WILL FALL AS WELL…

If you own individual BONDS, the same is true (BOND PRICES WILL FALL IF INTEREST RATES GO HIGHER), BUT that is irrelevant if you plan on holding the BONDS until maturity.

BONDS mature at $1,000 no matter where they trade beforehand. You could own a BOND that’s a real “DOG” and trades all the way down to $800… AND at maturity, it will be redeemed for $1,000.

The only way that won’t happen is if the company goes BANKRUPT. So barring that rare occurrence, BONDHOLDERS will get their money back – or earn a profit if they were able to buy the BOND at a discount – and collect income along the way.

Here’s why I’m so excited about BONDS now. After years of record-low interest rates, BONDS are finally sporting decent yields.

You can get BONDS of high-quality companies with 6% or 7% yields. I’m talking about companies like JPMorgan Chase (JPM) and Ally Financial (ALLY).

AND the timing couldn’t be better!!!

Currently, the economy is strong. Despite everyone’s fears of recession, unemployment is near record lows, wages and productivity are rising, and more dollars are being invested in the U.S. by overseas companies than ever before.

Inflation is still too high, and I suspect it is not under control yet. So we could still get some more interest rate hikes, BUT soon we are likely going to see the end of the rising rate environment. Should the economy sputter and we fall into recession, RATES WILL COME DOWN, which will make the BONDS that you hold more valuable.

If you own a BOND yielding 6% and interest rates DROP next year, an equivalent BOND may then yield 5%. So your 6% BOND will jump in price because it’s more desirable.

Eventually, it will rise in price enough to yield 5% – for someone else. Yet, you will still earn 6% until maturity… OR you could “SELL” the BOND for a PROFIT at the elevated price.

Remember, BONDS are called “FIXED” income assets. The interest won’t vary; it will stay “FIXED”. If rates DROP, you will continue to earn the SAME YIELD as the day you bought the BOND.

So today’s BOND yields may be even more attractive in a year or two if interest rates fall.

PEACE & BLESSINGS

Kenneth Reaves, Ph.D.

Thursday, September 21^st, 2023

Utilize COMPOUNDING To Increase Profits

For YOU, ME, WE the ATWWI FAMILY, COMPOUNDING is a WONDERFUL phenomenon. It allows us to earn ADDITIONAL return by earning INTEREST on INTEREST. Furthermore, the more frequently COMPOUNDING occurs, the incrementally higher the overall return.

Earn Interest on Interest

Let’s say “JOHN” invests $1,000 in a money market account with 3% annual interest rate.

If the account COMPOUNDS interest only once per year, at the end of the first year, John would earn $30. In the second year, the 3% interest rate would apply to the $1,000 principal and the $30 interest from the first year.

At the end of Year 2, John’s money market account would be worth $1,060.90 ($1,000 principle plus $60 interest on the principal plus $0.90 interest on the Year-1 $30 interest. The extra $0.90 doesn’t sound like a lot, BUT if you had a larger principal and longer period of time, the effect of COMPOUNDING would be exponentially LARGER!!!

In real life, money market accounts generally COMPOUND more than once per year. In the case of MONTHLY COMPOUNDING, it means that every month, interest would be accredited to John’s account, and that interest would earn interest also… going forward.

Since the 3% interest rate is annual, every month the applicable interest rate is actually 3% DIVIDED by 12, or 0.25%.

Each year the account value goes up slightly more with MONTHLY COMPOUNDING compared to ANNUAL COMPOUNDING.

At the end of ten years, MONTHLY COMPOUNDING earned you $5.43 extra. Put another way, through MONTHLY COMPOUNDING, John earned 1.6% more in interest ($349.35 vs. $343.92).

Yes, the difference is small, BUT if everything else between the two accounts is the same—which it is—then that 1.6% earned through more frequent COMPOUNDING is literally the proverbial “FREE LUNCH”. Why would YOU, ME, WE, the ATWWI FAMILY turn down extra return when there’s no extra RISK???

Dividends COMPOUND Too

You may not have thought much about it, but the frequency feature of COMPOUNDING also carries over to STOCK DIVIDENDS. Most U.S. companies pay dividends every QUARTER, BUT there are at least five (5) dozen stocks that pay dividend on a MONTHLY basis.

Most of these dividend payers are real estate investment trusts (REITs). They own portfolios of properties that they lease out to tenants and collect rent. Since they tend to have regular monthly rent income, they can turn around and distribute some of that cash flow out to shareholders (technically, “UNIT” holders) every MONTH.

There are all kinds of REITs specializing in different industries, such as retail, commercial, industry, office, medical, and so forth. There are even mortgage mREITs which specialize in owning mortgages rather than actual real estate.

In any case, if you receive a MONTHLY dividend, you can more frequently reinvest that cash into something that earns you a return. The more frequently COMPOUNDING occurs, the more incremental return you can squeeze out.

NOTE: If you reinvest the dividend in the same stock or invest it in another stock, it is possible to lose money since stocks can go down. HOWEVER, since the stock market goes up over the long run, unless you happen to invest in some VERY BAD stocks, reinvesting dividend should result in a positive return over time.

Do Your Homework and Pass The “TEST”

Here is where you should practice DUE DILIGENCE...

You should not pick a stock solely because it pays a MONTHLY DIVIDEND or offers a HIGH YIELD. An “ABNORMALLY” HIGH YIELD is usually a “RED FLAG” that you need to check out the company more to overstand/understand why the yield is so HIGH.

BUT, if you find a financially sound company that pays a MONTHLY DIVIDEND, you can give yourself the opportunity to earn more return.

PEACE & BLESSINGS,

Kenneth Reaves, Ph.D.

Wednesday, September 20^th, 2023

MISTAKES To AVOID When Hiring a Financial “ADVISOR”

If you are considering hiring a financial “ADVISOR”…know that choosing a financial “ADVISOR” is a MAJOR decision that can determine your financial trajectory for years to come. BUT, the wrong one could potentially wreak HAVOC on your investments and retirement. 

The value of working with a financial “ADVISOR” varies by person and “ADVISORS” are legally prohibited from promising returns, BUT research suggests people who work with a financial “ADVISOR” feel more at “EASE” about their finances.

Being aware of these seven (7) common blunders when choosing an “ADVISOR” can help you find peace of mind, and potentially avoid years of stress.

1. Hiring an “ADVISOR” Who Is Not a Fiduciary
By definition, a fiduciary is an individual who is ethically bound to act in another person’s best interest. This obligation eliminates conflict of interest concerns and makes an “ADVISOR’s” advice more trustworthy.

If your “ADVISOR” is not a fiduciary and constantly pushes investment products on you, find an “ADVISOR” who has your best interest in mind.

2. Hiring the First “ADVISOR” You Meet
While it’s tempting to hire the “ADVISOR” closest to home or the first “ADVISOR” that comes up in your GOOGLE search, this decision requires more time. Take the time to interview at least a few “ADVISORS” BEFORE picking the best match for you.

3. Choosing an “ADVISOR” with the Wrong Specialty
Some financial “ADVISORS” specialize in retirement planning, others are better for business owners or those with a high net worth, and some might be best for young professionals starting a family. Be sure to overstand/understand an “ADVISOR’s” strengths and weaknesses – BEFORE signing on the dotted line.

4. Picking an “ADVISOR” With an Incompatible Strategy
Each “ADVISOR” tends to have his/her own “UNIQUE” strategy. Some “ADVISORS” may suggest aggressive investments, while others are more conservative. If you prefer to go all in on stocks, an “ADVISOR” that prefers bonds and index funds is NOT a great match for your style.

5. Not Asking About Credentials
To give investment advice, financial “ADVISORS” are required to pass a test. Ask your “ADVISOR” about their licenses, tests and credentials. Financial “ADVISORS” tests include the Series 7, Series 4, Series 66 and/or, Series 65. Some advisors go a step further and become a Certified Financial Planner, or CFP.

6. Not Overstanding/Understanding How They are Paid
Some “ADVISORS” are “FEE ONLY” and charge you a flat rate no matter what. Others charge a percentage of your assets under management. Some advisors are paid “COMMISSIONS” by mutual funds, a SERIOUS CONFLICT OF INTEREST!!!

If the advisor earns more by ignoring your best interests, do not hire that person.

7. Not Hiring a Vetted “ADVISOR”
Chances are, there are several highly qualified financial “ADVISORS” in your town. A SUPREME vetting procedure is to ask the “ADVISOR” the following question:

Last year, did your personal trade/investment portfolio generate more income/profit than you earned via fee for service and/or “COMMISSIONS”???

If the answer is “YES” ask the “ADVISOR” to provide you with “PROOF” (i.e. redacted tax returns).

If the answer is “NO” leave the premises???

PEACE & BLESSINGS

Kenneth Reaves, Ph.D.

Tuesday, September 19^th, 2023

How To “INSERT” AI Into Your Portfolio

Are you using artificial intelligence (AI) in your trading???

You better be…

If not, you are competing against folks who have an “UNFAIR” advantage.

Ask any market expert out there what makes the BIG boys so much more successful than the little guys, and they will tell you three (3) things: The BIG boys have more money to hedge with… they have better data… and they use complicated computer systems to pull all that data together.

For decades, this has created an “UNFAIR” advantage. The BIG boys have always had an edge.

BUT, that’s changing…

Few folks know the full HIStory of how AI came into the secretive world of trading, but most research points back to a project called “ZAG TRADER”. It comes from a team of researchers at Carnegie Mellon.

By today’s standards, the project was simple. “ZAG TRADER” was built to use HIStorical market data to make predictions about future stock prices. (Now we use systems like this all the time.)

What was unique about the idea – and why the school’s computer department was so excited about it – was that the machine could learn from its mistakes.

That’s a trait that many/most humans think they have… but DON’T!!!

We think we learn from our losing trades. BUT, often our “LOGIC” is off. We mistake CORRELATION for CAUSATION!!!

Computers are good at figuring these things out. Humans… not so much.

Because of its ability to learn, “ZAG TRADER” worked.

IT BEAT THE MARKET!!!

Now Wall Street’s biggest firms look to hire folks who have Carnegie’s Tepper School of Business listed atop their “GILDED” degrees.

Graduates of its computational finance program have a job offer rate of 98%.

Their average salary is $125,000, and signing bonuses stretch as high as $150,000.

Where are they going???

The latest list of firms includes all the usual suspects – JPMorgan Chase (JPM), Citigroup (C), Goldman Sachs (GS) and, Bank of America (BAC).

Again… the BIG boys have been using AI for decades. It shows. That’s why they are BIG!!!

BUT now, as you may have heard, their “COMPETITIVE” edge is waning.

AI has had a bit of a breakout at the retail level this year. The trend is only going to get BIGGER, HOTTER and, more PROFITABLE from here.

Right now, there are many ways for the average investor to take advantage of AI. Some you have to put in a bit of work to use… BUT there are others that have already done the work for YOU, ME, WE, the ATWWI FAMILY.

For example, did you know that we have access to AI-focused exchange-traded funds (ETFs) – a combination of two (2) of the great financial equalizers of our time???

The Global X Robotics & Artificial Intelligence ETF (BOTZ) has $2.5 billion under its thumb. It invests in companies that USE or CREATE AI.

The Robo Global Robotics and Automation Index ETF (ROBO) has $1.5 billion in assets.

They’re both up by double digits this year (2023).

Best of all, there’s no need to hire expensive computer “GEEKS” or shell out for “CUSTOMIZED” programs.

PEACE & BLESSINGS

Kenneth Reaves, Ph.D.