Bonds vs REIT

Traditionally most investors like to split their portfolio into stocks and bonds and balance based on their risk preference. Bonds are less volatile than equities so investors tend to buy more bonds when they are not confident the market will do well. The inverse also applies, when investors believe the market will do well they will rebalance by placing more of their portfolio into the stock market. We know from the laws of supply and demand that as demand increases the price of the item will increases in response. As investors flock to bonds in times of economic trouble the bond prices increase. Since prices and yields of bonds have an inverse correlation bonds tend to have lower yields in times of economic hardship.

10 Yr Treasury Chart

In the most recent recession in 2008, investors that went to the bond market for safety experienced amazing returns that were abnormal for a recession period. It would be imprudent to believe that it will happen the same way again. Even though bonds are safe and offer almost a guaranteed return, here at Nicholas Wealth we encourage clients to find efficient ways to make their capital work for them. Bonds may be used for income or safety and sometimes both but there may be an alternative that provides greater yields with bond-like volatility. REIT stands for Real Estate Investment Trust, and it is an increasingly popular investment option. REITs are companies that own, build, or finance income-producing real estate in many different property sectors. They are required to pay out at least 90% of their income as a taxable dividend to investors. They must also maintain 75% of their assets in real estate as well as generate 75% of their income from rents, mortgage interest, or sales of real estate. Many REITs can be traded like stocks and provide a great level of liquidity. In 2017 stock exchange listed REITs paid out approximately 53.2 billion dollars in dividends to shareholders and the dividend yield outperformed S&P500 dividends.

 

We believe that REITs may provide an income generating escape from any future market corrections. They would be a great add on to replace corporate or municipal bonds in your portfolio. They operate with the liquidity of an ETF and how a low correlation to the market makes it a safe long-term investment. They grow in equity and pay out much higher yields than treasuries can pay. In 2008 real estate was the cause of the economic collapse; however, our economic data does not give us any reason to suggest that it will happen the same way. REITs can be a favorable option for your portfolio. Every situation is different and here at Nicholas Wealth, we look at each client’s wants and needs and address them individually. It is important to see an advisor to set up a retirement plan and make sure your portfolio can weather the storm.

 

Sources

https://www.investopedia.com/trade-war-slams-crude-oil-stocks-and-bond-yields-4688392

https://www.bloomberg.com/quote/USGG10YR:IND

https://www.ft.com/content/d78394b4-7b2c-11e9-81d2-f785092ab560

https://www.gurufocus.com/yield_curve.php

https://www.cnbc.com/2019/05/24/us-bonds-in-focus-on-wall-street-amid-ongoing-trade-war-worries.html

Securities offered through TCM Securities Inc., 2230 Towne Lake Parkway, Building 800, Suite 300, Woodstock, GA 30189. 404.889.8733. Members FINRA/SIPC. Investment advisory services offered through Triumph Wealth Advisors.