Does Real Estate Offer Yield In A Low-Yield Environment?
With contributions by Charles Bowyer.
I believe that REITs share some characteristics with traditional fixed income, in the form of bonds, in that their cash flow comes from leases, which are akin to fixed income. And according to a Visual Capitalist report, interest rates were already at roughly 700-year lows before the Federal Reserve’s recent cut to the Fed Funds rate and massive quantitative easing program. *
What do those two points have to do with each other? REITs are offering relatively very high yields in a time when investors are searching for opportunities in a tumultuous market. The sell-off that has characterized the month of March according to the data shows that real estate is one of the industries hit hardest by the crisis, and is now more attractive relative to some other potential investments than it was before the crisis.
This chart shows the dividends yield of the index that I work on, U.S. Diversified Real Estate Index (USREX), as of March 16th, against its yield at the end of January.
We’re comparing dividend yields for USREX to dividend yields for the S&P 500 and yields for Barclays U.S. AGG, as well as 10-Year Treasuries. While USREX leads this pack at the end of January, it does so even more after the start of the recent sell-off.
As mentioned, we believe real estate shares some characteristics with bonds, and according to our analysis, REITs perform in between bonds and the S&P 500 more often than not. So it’s appropriate to compare a real estate index such as USREX to both. In that comparison, USREX is netting dividend yields nearly 7 times as high as the yield from 10-Year Treasuries, and nearly 3 times as high as the yield from an aggregate bond index such as Barclays U.S. AGG.
It’s important to note that we are not saying that these dividends will stay the same in the future. We’re comparing the yields of these different potential investments at a particular point in time, not making projections about what they will be in the future.
That being said, as of 3/16/2020, REITs are on at “discounted” valuations relative to history and to the other investments we’ve shown above, and potentially offering yields much higher other potential investments. In the midst of this sell-off, you could get a lot more yield for your dollar from USREX.
Compare it with treasuries directly: 10-Year Treasury yields are at 0.72%, and REITs, represented by USREX, are offering yields of up to almost 5%. The spread between these two potential investments is relatively large.
* Source: “Visualizing the 700-Year Fall of Interest Rates,” February 2020, VisualCapitalist.com
** Source: “Visualizing The Near-Zero Bond Yield Problem,” March 2020, Vident Financial
Originally published on Townhall Finance.
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.