Behind The Great REIT Selloff

By Charles Sizemore

As we jump into May, I can find very little cause to complain. The Dividend Growth Portfolio is off to a solid start, up 5.7% through April 30, net of all fees and expenses.

This compares to a total return in the S&P 500 of just 1.9%.

The portfolio's high allocation to energy and to non-US stocks have been major drivers of performance, and I continue to view these areas as being particularly attractive.

 

REITs

 

REIT Selloff

Alas, all the news can't be good. REITs—which make up about a quarter of the portfolio—are suffering their worst correction in two years.

As an example, Realty Income (O), considered one of the highest-quality blue chips in the REIT space, is down about 15% from its late January highs and now yields about 4.8% in dividends.

That's a comfortable spread over the 10-year Treasury of about 2.8%.

 

Steep Decline

STAG Industrial (STAG), a smaller and more speculative REIT holding of the Dividend Growth portfolio, has seen an even bigger selloff.

STAG is down about 21% from its recent highs and now yields over 6% in dividends.

I will save you the details of a REIT-by-REIT breakdown, but suffice it to say that the entire sector is down significantly from its January highs.

This begs two questions:

1. Why the price declines?

2. What do we expect going forward?

 

Profit-Taking

Part of the reason for the decline is simply profit taking.

REITs, along with most other income-oriented assets, had a monster 2014, and some of what we're seeing in 2015 is nothing more than the ebb and flow of the market.

We also have to remember that, as income-oriented assets, REITs are extremely sensitive to changes in bond yields.

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