This Undervalued Income Stream Consistently Beats The S&P 500
For months, we’ve been telling StreetAuthority readers to expect the Federal Reserve to hike interest rates this year. And now, the moment has finally arrived: On December 16, the Fed announced that it would raise interest rates by a quarter percentage point, to between 0.25% and 0.5%.
But we’ve also maintained that much of the furor in the media surrounding the possibility of a rate hike is nonsense. The name of the game will probably be “low and slow” after this first rate hike. And considering how long this has already been dragged out, companies and individual investors have had ample time to prepare.
#-ad_banner-#In short, keep your focus on buying fantastic companies at reasonable prices and the rest should take care of itself.
My colleague Andy Obermueller has mentioned a favorite asset class that is directly affected by interest rates: real estate investment trusts, or REITs for short. But rather than shy away from this asset class, Andy has been telling his readers to prepare for a tremendous buying opportunity.
REITs work like this. As a public company, REITs pool cash from investors to buy income-producing real estate. They receive special tax consideration, if they distribute at least 90% of taxable income to shareholders — making them an attractive investment for those looking for a steady stream of dividends.
To grow, many REITs use leverage. Borrowing money allows them to buy more properties, which in turn increases rental income. Then, they can pass these additional earnings on to shareholders. As management identifies more opportunities, the company borrows funds or sells more shares, and the cycle continues.
As Andy recently pointed out to his Game-Changing Stocks readers, this is not merely a good deal. It is a GREAT deal.
| REITs are an income stream that might not seem very sexy in a growth-oriented newsletter about The Next Big Thing, but taken as a class they are pretty alluring. Consider: The Dow Jones Real Estate Trust Index (Ticker: REIT) has returned 102.9% during the past decade against a 67.7% rise in the S&P 500 Index. Yes, really. And it gets better… Over an even longer horizon, REITs kicked even more tail. Since April 1999, which is as far back as Google Finance has the data, REITs have risen 529% to the market’s mere 63.2% advance. If you parked a hundred large in REITs in April 1999, you’d have about $630,000 today. If you invested in the market, you’d have $163,000. So I guess you might say REITs aren’t especially sexy, unless you like cash. I happen to. It’s not all peaches, cream and fat dividends, though. You see, Wall Street gets very leery of REITs when the threat of higher rates emerges. Income investors buy income streams, and if the future of that income stream is called into question by higher borrowing costs, it can hammer the stock. REITs hit a peak in January and since have lost about 10%, even though they’re still beating the S&P 500 by a factor of two. |
A few REITs have been disproportionally affected by the market “pricing in” a rate hike. One of those is one of Andy’s favorites, Medical Properties Trust (NYSE: MPW).
This REIT owns 187 medical buildings and rents them to about 30 hospitals and other health-care providers. In fact, it is the only REIT that focuses solely on this niche.
Andy’s case for MPW essentially boils down to this:
1. Interest rates will continue to slowly rise in the foreseeable future. This will initially hurt REITs like MPW, yes, but management should be prepared. And as I’ve pointed out before, rates will likely remain low for a long time after this first hike anyway.
2. Andy rightly points out that hospitals aren’t going anywhere. So while interest rates might affect retail or residential real estate-focused REITs, healthcare is one of the most stable sectors in the market.
3. Wall Street is off-base on its valuation of MPW. REITs are often judged by a metric called “funds from operations (FFO)”, which is usually expressed on a per share basis. MPW’s trailing 12 month FFO is currently 0.76 per share. The stock is currently trading for around $11.30, so its price-to-FFO comes in at about 14.9. Over the past five years MPW has traded at an average P/FFO of approximately 20. That means you can now buy shares at a 33% discount. Shares would need to rise to roughly $15.50 to trade at its historical average.
4. While shares have as much as 50% upside, you’ll get paid to wait while locking in a fantastic 7.7% dividend yield.
A “boring” REIT isn’t the type of stock that Andy usually recommends to Game-Changing Stocks readers. But our goal is to help you build wealth. MPW offers a chance to take advantage of market mispricing while collecting a solid income stream that’s more than triple the average S&P 500 stock.
If MPW is too run-of-the-mill for your taste and you’re looking for the kinds of triple-digit upside opportunities Andy normally recommends, then I encourage you to take a peek at Andy’s game-changing predictions for 2016. In it, he details companies he expects to change the world and earn a handful of early investors huge returns.
Now, not every pick will be a home run, but based on Andy’s stellar track record, I wouldn’t want to bet against him.
Most of the companies in his report aren’t well-known to the average investor at this point. But by this time next year, more than a few of them could be household names. To get your hands on this “shocking” financial briefing, simply go here.