We’ve just been handed a unique opportunity to grab 7.9%+ dividends—and price upside, too.
Now it does involve some risk, and you’ll have to be quick to reap the biggest gains (and dividends).
A Contrarian High-Yield REIT Strategy for Huge Cash Payouts
First up, the opportunity we’re going to dive into today revolves around real estate investment trusts (REITs) that invest in shopping malls and other retail properties.
If you’ve been reading columns written by me and my colleague Brett Owens, you know we’ve been critical of retail REITs, which were being decimated by Amazon AMZN .com (AMZN), eBay EBAY (EBAY) and other online giants before the pandemic hit.
That call was on the money: while the S&P 500 is now positive on the year, major REITs that invest in retail property, like Realty Income O (O), Simon Property Group SPG (SPG), National Retail Properties NNN (NNN) and Tanger SKT Factory Outlet Centers (SKT) are still on the mat.
This plunge has set up some high yields in the retail-REIT space. Simon, for example, yields 7.9%. And Realty Income pays 4.5%, which is near multi-year highs for the self-anointed “monthly dividend company.”
But there’s a low-key catalyst that could soon start driving these REITs’ beleaguered shares higher. That, in turn, would push their dividend yields lower (as you calculate yield by dividing the yearly payout into the current share price). So if you have some cash available for more speculative investments, this could be the time to start floating some of those funds into this beaten-up sector.
Let me explain why.
Retail REITs in Normal Times
First, let’s back up. REITs are basically “pass-through” investments: management collects the rent, keeps enough money to pay for maintenance, possibly expansion, and to keep the lights on, then hands the rest to us as dividends.
The lockdowns, of course, put a serious damper on these dividends. Tanger, for example, suspended its payout in May. And if retailers can’t pay rent, there’s good reason to think retail-REIT dividends won’t be back to normal soon. That’s mainly why retail REITs have plummeted—income-hungry investors jumped ship.
But there’s a quiet shift happening here that few people know about: essentially, retail REITs have realized they can’t beat Amazon, so they’re joining it.
A Quiet Trend Develops
As great as e-commerce is, it loses its appeal when you have to wait days to get your order. This is why Amazon started offering same-day delivery in 2015. Since then, it’s expanded this option, which is a main reason why Amazon customers remain loyal.
But how does same-day delivery work?
Amazon can’t transport goods faster than anyone else, as it has the same infrastructure limitations (speed limits on highways, for example). So it relies on a network of storage depots to get around this. In other words, Amazon needs space near where people live. And that’s where most retail REITs have their properties located.
This shift is already in the works: in the last few days, we’ve seen reports of Amazon beginning talks to take over massive spaces once used by Sears and other retail giants of yore. That includes a report in the Wall Street Journal of Amazon meeting with Simon, with an aim to convert some of the mall owner’s department-store locations into Amazon distribution hubs.
The obvious way to buy into this shift is through Simon Property shares. But Simon isn’t your only avenue: many other retail REITs could also be solid options for Amazon.
The bottom line? If these reports are accurate and deals get done, this period could be remembered as a golden age for contrarian REIT investors.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Safe 11% Dividends.”