A Dynamic Duo for Yield in 2022
Investors should maintain core positions in both REITs and utilities, with regular contributions to both.
COVID-19, inflation and the Federal Reserve have so dominated the financial news that it was easy to miss the run-up in utility and real estate shares.
In the fourth quarter of 2021, real estate investment trusts (REITs) averaged a 17.5% return and utilities averaged 12.9%. The first few days of 2022 were poor, but I remain all-in on the duo, given that the chatter about higher interest rates is unlikely to translate soon into livable terms on savings accounts, CDs, money market funds and new government bonds.
I have doggedly dissed the dated doctrine that demeans REITs and utilities as "bond proxies" whose business models and investor returns depend on low and falling interest rates. I predict that both groups (other than in rare, random cases of mismanagement) will flourish as America absorbs this moderately higher inflation along with strong economic growth.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
These are not merely defensive stock sectors. Utilities earn more and pay bigger dividends when they sell extra water and power. They are major landowners and both builders of and investors in renewable-energy projects.
The bulk of property-owning REITs are also developers and acquirers whose appreciating land and building values and rising rents support ever-higher dividends.
In 2021, according to Hoya Capital, 130 publicly traded realty trusts boosted dividends. That is more than 75% of them. It's not unusual to see five-year compound growth rates of 10% for cash flow and dividends.
I urge that all income-focused portfolios maintain core positions in both REITs and utilities, with regular contributions as you see fit. Through Jan. 7, Standard & Poor's real estate index shows an annualized 10-year total return of 12.6%; utilities clocked in at 11.2%. Dividends are 4% of that haul with utilities; 3.5% with real estate.
What Stocks to Buy Now
Within the property REIT sector, 15 of 16 subsectors returned at least 18% in 2021 (lodging was the exception). I advise you to stay with what is working, but with REITs, one year's laggards often become next year's leaders (not always the reverse, though).
Housing and industrial REITs are expensive now. Hold them for their high yields, but do not chase them with fresh cash. Lodging and healthcare REITs should score well in 2022; comeback ideas include Community Health (CHCT, $48) and Omega Healthcare (OHI, $31), and in hotels, Host Hotels and Resorts (HST, $18) and Xenia Hotels and Resorts (XHR, $18). Hotel REITs still pay zero or a pittance in dividends, but the shares are deeply discounted to net asset value, and when profits return, so will their payouts. Remember, retail and office REITs were pronounced dead two years ago but revived.
Utilities are essential businesses. Everyone needs heat and light, and usually there is a local monopoly. Utilities should clean up over the years from electric cars and cheaper electricity generation from wind and solar. They have ready access to inexpensive capital and a friendly administration that wants to help with reconstruction and service quality.
My favorites include American Water Works (AWK, $174), National Grid (NGG, $72) and Xcel Energy (XEL, $69). Or use the Utilities Select Sector SPDR Fund (XLU, $70). I am not a fan of indexing, but consolidation within the industry leaves less scope for active managers to find mispriced investments. The ETF's yield is just shy of 3%.
To continue reading this article
please register for free
This is different from signing in to your print subscription
Why am I seeing this? Find out more here
-
How to Help Your Kids Without Ruining Your Retirement
Here are some general considerations to ensure the gift of assets to your kids will not negatively affect your financial future.
By Mario Hernandez Published
-
AI to Power the Next Generation of Robots
The Kiplinger Letter There's increasing buzz that the tech behind ChatGPT will make future industrial and humanoid robots far more capable.
By John Miley Published
-
A Spotlight on the Pacific States: The Kiplinger Letter
The Kiplinger Letter Most Pacific states are seeing good job growth in multiple sectors including tourism, hospitality, and construction.
By David Payne Published
-
The Robots Are Coming... But Not For a While
The Kiplinger Letter There’s excitement in the tech sector over the potential of humanoid robots, but widespread adoption is likely to be years away.
By John Miley Published
-
Farmers Face Another Tough Year As Costs Continue to Climb: The Kiplinger Letter
The Kiplinger Letter Farm income is expected to decline for a second year, while costs continue to up-end farm profitability.
By Matthew Housiaux Published
-
A Spotlight on the Mountain States: The Kiplinger Letter
The Kiplinger Letter Most Mountain states are seeing good job growth in multiple sectors from healthcare, energy, and semiconductor production to farming and government.
By David Payne Last updated
-
A Spotlight on the Plains States: The Kiplinger Letter
The Kiplinger Letter The labor market is tight in the Plains states and outside of healthcare and construction most sectors are flat or down.
By David Payne Published
-
Kiplinger's Commodities Forecast
The Kiplinger Letter Following a rocky few years for markets, we expect commodities to be less volatile in 2024, as a post-pandemic normal finally emerges.
By Matthew Housiaux Published
-
Growth Stalls in China As Property Market Continues to Struggle: The Kiplinger Letter
The Kiplinger Letter The property market remains a major drag on Chinese growth, with sales now 50% below their peak.
By Rodrigo Sermeño Published
-
A Spotlight on the South Central States: The Kiplinger Letter
The Kiplinger Letter Outside of the tech sector slump, job growth in the South Central states remains buoyant, with healthcare, construction and business investment going strong.
By David Payne Published