Am i nuts or is trading Reits on a longer term horizon a pretty decent option. If a Reit yields approx. 8%, then one could by on full margin and get 16% less margin interest/ yr. Seems like a decent long term strategy to put short term profits to work. Almost seems like a a higher yielding bond. Any thoughts.
Trading Reits
- Thread starter bignatty
- Start date
It really depends on who you talk to. According to Forbes, eventually those who buy REITS on margin will get "theirs," meaning a whacking. I guess the thinking is that, at some point in the short term (meaning less than 6 months) the stock market will get better.
However, the link below would indeed concur with you that buying REITS on margin the last couple of years and even now presents a fortuitous opportunity. The KEY though is your selection. Check out the link below for more.
http://www.aamg.com/past/hesitation.htm
bignatty,
Don't forget to factor in the principal risk of the underlying in addition to your 8% (16%) dividend income. Right now REITS are probably peaked out...the time to buy them is on the other end of the interest rate cycle. So, if you want to lever-up and buy them for the income, be prepared to wait until the cycle comes full circle to unload them...or else as rates rise, their price will fall, and you could lose far more than 8-16% in this decrease in price. Basically, you should view these like bonds. I mean, imagine if you had bought these things on leverage when rates were topping out? I remember REITS yielding 16%...you could have levered that up, gotten a 32% yield, plus principal appreciation!
So, depending on how long this next interest rate cycle takes, you also have to make some assumptions about 1.) real-estate risk, and 2.) company (REIT) specific risk (management, tenants, etc) between here and there...how much are you willing to be compensated for such risk?
Personally, I'm going to wait until the other end of the rate cycle (rates have risen significantly, REIT prices have dropped, and yields are high) and then assemble some sort of diversified REIT portfolio.
However, if your "required return" is less than all these components, go for it!
Cheers,
MYD
Don't forget to factor in the principal risk of the underlying in addition to your 8% (16%) dividend income. Right now REITS are probably peaked out...the time to buy them is on the other end of the interest rate cycle. So, if you want to lever-up and buy them for the income, be prepared to wait until the cycle comes full circle to unload them...or else as rates rise, their price will fall, and you could lose far more than 8-16% in this decrease in price. Basically, you should view these like bonds. I mean, imagine if you had bought these things on leverage when rates were topping out? I remember REITS yielding 16%...you could have levered that up, gotten a 32% yield, plus principal appreciation!
So, depending on how long this next interest rate cycle takes, you also have to make some assumptions about 1.) real-estate risk, and 2.) company (REIT) specific risk (management, tenants, etc) between here and there...how much are you willing to be compensated for such risk?
Personally, I'm going to wait until the other end of the rate cycle (rates have risen significantly, REIT prices have dropped, and yields are high) and then assemble some sort of diversified REIT portfolio.
However, if your "required return" is less than all these components, go for it!
Cheers,
MYD
i would look at it the way you'd look at an investment in your retirement account.
if the company is stable and has growth of cash flow, sure.
the economy is weak, and odds are it will not suddenly get stronger. i know the lowry advice that a bottom is in, but you have to trade what you see and not what other people think. if you can't decide what is right, you shouldn't be trading (i make it sound so easy, don't i??)
this week i woulda certainly benefitted had i heeded my own advice...
but who knows what the next scandal will be, as with the power companies last year...like DUK, AEP and PEG and those guys...so that is the risk. considering REITs have a healthy div yield, you might consider burning that yield partially with a hedge. i've never done this, and i have traded REITs quite a bit, so it's just an idea...
politics aside, my feeling on dividends is that it's being used as a potential band-aid by the politicians right now, but is unlikely to be passed anytime soon.
sure, the double-taxation will eventually be eliminated (because it's stupid), but i don't see the economy being able to afford it right now. and i think that if it was a true priority in congress, it would've been passed BEFORE a general income tax cut was passed. i mean, think about it -- the dividend cut WILL definitely help the economy out in a much broader sense that the tax cut that has already been passed.
i hope this helps...the REIT issue is really interesting, as it touches on the broad economy...
if the company is stable and has growth of cash flow, sure.
the economy is weak, and odds are it will not suddenly get stronger. i know the lowry advice that a bottom is in, but you have to trade what you see and not what other people think. if you can't decide what is right, you shouldn't be trading (i make it sound so easy, don't i??)
this week i woulda certainly benefitted had i heeded my own advice...but who knows what the next scandal will be, as with the power companies last year...like DUK, AEP and PEG and those guys...so that is the risk. considering REITs have a healthy div yield, you might consider burning that yield partially with a hedge. i've never done this, and i have traded REITs quite a bit, so it's just an idea...
politics aside, my feeling on dividends is that it's being used as a potential band-aid by the politicians right now, but is unlikely to be passed anytime soon.
sure, the double-taxation will eventually be eliminated (because it's stupid), but i don't see the economy being able to afford it right now. and i think that if it was a true priority in congress, it would've been passed BEFORE a general income tax cut was passed. i mean, think about it -- the dividend cut WILL definitely help the economy out in a much broader sense that the tax cut that has already been passed.
i hope this helps...the REIT issue is really interesting, as it touches on the broad economy...
MYD, good post.
someelse indicated that they should be analyzed similarly to fixed-ncome instruments. in an inflation cycle, bonds get killed, but real estate tends to increase - a bond is a financial asset; real estate is REAL - big difference. i agree with your decision to wait and for higher rates, although most if not almost all REITS probably have refied with 5 to 10 year calls. also consider that as homes become more expensive when rates rise, apartment REITS may do well.
i also trade REITS - wont bore you with details - one strategy is to look for REITS with high payout ratios (too high) and wait for eventual divvy cut - do not buy immediately - wait a few days and the dump will continue. stupid funds bought much higher but wont hold with a 80% payout based upon reduced divvys. buy high, sell low strategy.
the reit will float up eventually to a "normalized" divvy yield. thats the time to sell some. reload if it settles back down. these type of plays are not for rip van winkle -they generally have some sort of "issue" - also note the tax bennies since much of the divvy is return of capital rather than income. check out the action on TCR when they cut the divvy... good play from sub-$7 up to over $8. 15% - 20% quick cap gains plus the underlying yield of 11.43% at $7 entry. its now dumped again on news its taking over another company. good luck.
why max margin - keep some powder dry?
