Residential Secure Income (ReSI), which invests in affordable shared ownership, retirement and local authority housing, has exchanged contracts for GBP29 million to acquire up to 85 newly completed homes for delivery as shared ownership. Owning your own home can be a good investment, but it’s not the same as owning income properties, which have the potential to produce cash income. Let’s examine the range of ways to invest in real estate for income, including REITs, triple-net leased property, Delaware Statutory Trusts and tenants-in-common properties. Utilities, with their steady performance and consistent dividend, can offer steady income to investors even during turbulent market conditions. While 2020 was a bumpy ride in the markets, many investors found that core investment principles still applied. As investors look towards 2021, these same lessons apply going forward. Not every income investor has the same needs, but there’s are companies on this list to fit the preferences of most dividend lovers’ portfolios. Investors often go crazy about diversification, which simply means they are not putting all their investments in one basket. They
Residential Secure Income (ReSI), which invests in affordable shared ownership, retirement and local authority housing, has exchanged contracts for GBP29 million to acquire up to 85 newly completed homes for delivery as shared ownership.
The properties are being acquired from Brick By Brick, the housing development company set up to deliver a large programme of high quality and affordable homes for local people across the London Borough of Croydon.
4 Ways to Invest in Real Estate to Generate Income
Earlier this year, the homeownership rate in the U.S. hit a post-Great Recession high, reaching about 68%, according to the U.S. Department of Commerce. Despite the pandemic (or maybe because of it), the housing market remains relatively strong. Low interest rates have helped the sector, including by allowing people to refinance their mortgages and save money every month.
While homeownership is a significant contributor to Americans’ wealth, it’s no substitute for the potential benefits of investment real estate. Investment properties may appreciate in value — like your residence — but also potentially generate monthly income while you own them — unlike your home.
Income-generation is a key reason many people diversify their investment portfolios to include different types of commercial, net-lease, self-storage, medical and multifamily real estate assets. And who wouldn’t benefit from additional monthly income? Certainly, retirees or near-retirees would, as would most other people. Additional monthly rental income can be used to support living costs, be reinvested or be saved.
Real estate investments that are cash-flow positive will potentially generate monthly income for investors. Notably, many real estate investments are predictable and durable in their ability to generate monthly income — although rental income is never guaranteed as real estate is not a bond but a living, breathing asset. During the pandemic some assets are performing particularly well, such as leased properties occupied by essential businesses, including drugstores, medical services, and shipping company industrial distribution facilities that deliver products purchased through e-commerce.
There are multiple ways to participate in the investment real estate market in pursuit of income and appreciation. Here’s a look at four ways to invest in real estate with income potential.
The market for publicly traded REITs is well established, and many people access the market through their retirement plans and stock brokerage accounts. REITs are typically companies that own and operate real estate, so you’re investing in the company, not just the underlying real estate. REITs pay out their income in the form of dividends, which are taxable.
The biggest downside to REIT investments (aside from their high correlation to the overall stock market and the volatility it ensues) is the absence of the ability to take advantage of a 1031 exchange — and thus defer taxation — on any capital gains from the sale of shares.
An example: Bob has invested $100,000 in a REIT that owns shopping centers. There is no monthly income provided by the REIT, but every quarter the company pays out the majority of its earnings, if any, in the form of dividends. The dividends are taxable as ordinary income. When Bob sells his shares, if there is a gain he will pay capital gains tax on the gain.
Triple-net leased properties are typically retail, medical or industrial facilities occupied by a single tenant. With a property of this type, the tenant — not the owner — is responsible for the majority, if not all, of the maintenance, taxes and insurance expenses related to the real estate. While these benefits can be potentially attractive, direct ownership of such properties comes with distinct downsides, starting with concentration risk if an investor places a large portion of their net worth into a single property with one tenant. Other risks are potential exposure to a black swan event, such as COVID-19, if the tenant turns out to be hard hit, and management risk.
I have owned dozens of triple-net properties over my career and they are anything but passive … they require intensive asset management to properly operate them.
An example: Ellen has purchased a small medical office building for $1.5 million. The building is occupied by a radiology company. Even though the tenant pays the majority of the building’s operating expenses, Ellen as the sole owner is responsible for working with the tenant to collect reimbursable expenses that she paid, working with the tenant on any rent relief requested in situations such as the COVID-19 shutdown, negotiating with the tenant any lease renewals and many other items. Income from the property, if any, is taxable, although she will be able to utilize depreciation deductions to shelter a portion of it. When Ellen sells the building, if there is a gain she can defer taxes if she reinvests the gain into another investment property utilizing a 1031 exchange. A potential negative for Ellen is that if the $1.5 million she paid for the building represents a large portion of her overall net worth, she is exposed to overconcentration risk.
A DST is an entity used to hold title to investments such as income-producing real estate. Most types of real estate can be owned in a DST, including industrial, multifamily, self-storage, medical and retail properties. Often, the properties are institutional quality similar to those owned by an insurance company or pension fund, such as a 500-unit Class A multifamily apartment community or a 50,000-square-foot industrial distribution facility subject to a 10- to 15-year net lease with an investment grade rated Fortune 500 logistics and shipping company. The asset manager (also known as the DST sponsor company) takes care of the property day to day and handles all investor reporting and monthly distributions.
DST investments are used by those investors seeking a cash investment with a typical minimum of $25,000, as well as those seeking a turnkey 1031 tax-deferred exchange solution.
An example: Richard has invested $100,000 in a DST that owns a $10 million industrial property occupied by a Fortune 500 shipping company. Every month the sponsor distributes Richard’s share of the monthly income, if any, to him in cash. The income is taxable, however partially sheltered via deductions. When the property is sold, Richard can defer taxes on any gain if he reinvests the gain into another investment property or DST using a 1031 tax-deferred exchange.
A TIC structure is another way to co-invest in real estate. With a TIC, you own a fractional interest in the property and receive a pro rata portion of the potential income and appreciation of the real estate. As a TIC investor you will typically be given the opportunity to vote on major issues at the property, such as whether to sign a new lease, refinance the mortgage or sell the property.
Although TIC investments and DSTs have their nuances and differences, they often will hold title to the same types of property. While the DST is generally considered the more passive investment vehicle, there are some circumstances in which a TIC is desirable, including if the investors wish to utilize a cash-out refinance after owning the TIC investment for a few years in order to get a large portion of their equity back, which can be invested in other assets. Both DSTs and TICs qualify for 1031 exchange tax treatment, which allows capital gains tax to be deferred if the gains are reinvested in other investment properties. Both structures are used by direct cash investors seeking diversification out of the stock market.
An example: Fallon has invested $100,000 in a TIC structure that owns and operates a 98-unit multifamily apartment building. Every month the TIC sponsor distributes Fallon’s share of the monthly income, if any, to her in cash. The income is taxable but is able to be partially sheltered via deductions. When the TIC property is sold, Fallon can defer taxes on any gain if she reinvests the gain into another investment property.
Investing in income properties provides diversification to a stock- or bond-heavy investment portfolio, and it also offers the potential for income in addition to appreciation.
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
Founder and CEO, Kay Properties and Investments, LLC
Dwight Kay is the Founder and CEO of Kay Properties and Investments, LLC.Kay Properties is a national 1031 exchange investment firm. The www.kpi1031.com platform provides access to the marketplace of 1031 exchange properties, custom 1031 exchange properties only available to Kay clients, independent advice on sponsor companies, full due diligence and vetting on each 1031 exchange offering (typically 20-40 offerings) and a 1031 secondary market.
Author: by: Dwight Kay
3 Utility Stocks to Consider for Steady Income Stream
Investors get return on their investment in stocks through regular dividend, bonus shares and share price appreciation. For a steady stream of income, investors can strengthen their position in defensive, matured, regulated and domestic-focused utility companies. Utility companies are known for their ability to distribute dividend at regular intervals.
The Utility space includes companies that provide electricity, water and natural gas to millions of customers across the United States. Demand for utility services tend to remain unchanged even during turbulent economic conditions. The pandemic in 2020 lowered the demand for utility services from the commercial and industrial (C&I) customer group. However, stay-at-home directives increased residential demand that offset a portion of demand decline from the C&I group.
The recent release from the U.S. Energy Information Administration (“EIA”) forecasts demand for electricity to increase 1.3% in 2021 from 2020 levels. The increase in electricity demand will be a result of expected colder temperatures in the first quarter than the same period last year. Even with the gradual rollout of vaccines, domestic demand is expected to be high, as many people will still be at home to avoid infection.
In the current near-zero interest rate environment, these matured utilities can be considered as bond substitutes due to its ability to pay steady dividend. Utilities continue to make capital investments to strengthen their infrastructure, which in turn helps them provide uninterrupted services to customers. Rate increases at regular intervals by the commission and regulatory authorities ensure steady income for the utilities. Consistent demand contributes toward steady performance of utilities and the companies tend to have strong cash flows that are distributed among shareholders as dividend.
Historical dividend payment should not be the only criteria to select the utilities as it does not guarantee future dividend payment. We have selected utilities based on their dividend yield, earnings growth expectation for 2021 and future capital expenditure plans that ensure steady performance. All the selected utilities have a market capital of more than $20 billion. Moreover, these stocks have returned more than the Zacks Utility – Electric Power industry in the past six months.
Charlotte, NC-based Duke Energy Corporation (DUK – Free Report) has a wide portfolio of electric and natural gas, along with regulated and unregulated businesses that supply, deliver and process energy in North America, as well as select international markets. It currently carries a Zacks Rank #3 (Hold) and has a market capitalization of $67.39 billion. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company intends to invest $58 billion during the 2020-2024 time period to strengthen its infrastructure and expand the renewable power generation portfolio. Its current dividend yield of 4.22% is better than the industry level of 3.35% and Zacks S&P 500 composite group’s average of 1.48%.
The Zacks Consensus Estimate for Duke Energy’s 2021 earnings of $5.22 per share has increased 0.2% in the past 30 days. The stock has gained 17.3% over the past six months compared with the industry’s rally of 12.9%.
Detroit, MI-based DTE Energy Company (DTE – Free Report) is a holding company, with subsidiaries engaged in regulated and unregulated energy businesses. It current has a Zacks Rank #2 (Buy) and a market capitalization of $23.5 billion.
The company intends to invest $17 billion during the 2021-2025 time period to strengthen its infrastructure and expand its portfolio. Its current dividend yield is 3.6%.
The Zacks Consensus Estimate for DTE Energy’s 2021 earnings of $7 per share has increased 0.2% in the past 60 days. The stock has gained 14% over the past six months.
Rosemead, CA based Edison International (EIX – Free Report) — through its subsidiaries — engages in the generation, transmission, and distribution of electricity in the United States. The company generates electricity through hydroelectric, diesel/liquid petroleum gas, natural gas, nuclear and photovoltaic sources. It currently has a Zacks Rank #2 and a market capitalization of $23.8 billion.
The company intends to invest $21.2 billion during the 2020-2023 time period to strengthen its infrastructure and expand its portfolio. Its current dividend yield is 4.22%.
The Zacks Consensus Estimate for DTE Energy’s 2021 earnings of $4.47 per share has increased 0.5% in the past 60 days. The stock has gained 14.7% over the past six months.
In addition to the stocks discussed above, would you like to know about our 10 top tickers for the entirety of 2021?
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Author: Zacks Investment Research
Applying 2020 Investment Lessons To Your Portfolio In 2021
New Year’s Eve has now passed and we are all looking forward to a rosier 2021. Yet despite the challenges faced in 2020, stock market returns ended up being a bright spot in a dark year for many investors. In fact, per Morningstar, the S&P 500 Index finished with a gain of 18.4% for the year.
But this type of market performance only looks smooth in retrospect. Living it day to day was a challenge for investors. In particular, the dark days of March and April had many investors doubting their overall strategy. The decisions that were made during this brief period of time had a long-term impact on how a portfolio performed through year end.
Interestingly enough, there were actions taken in 2020 that should be applied to portfolio construction going forward. Investors who maximized their investment returns in 2020 were found to have followed three basic strategies, including having the appropriate amount of fixed income in their portfolio, staying invested and continuing to buy throughout the year. While they may have had some uncomfortable moments while navigating the markets, they are reaping their rewards as we move into the new year.
Don’t Count Out Fixed Income
A frequent comment in any investment discussion is that bonds do not seem to provide any real return. In the low yield environment of 2020, investors were often questioning whether it was even worth having them in the portfolio.
But investors are not focusing on the key part of having bonds as an allocation in the portfolio. Bonds are not about getting return as much as they are about cutting volatility so that investors can participate in the equity markets. It is the “sleep at night” allocation of the portfolio. During the intense volatility of March and April, bonds helped mitigate the severe drop in portfolio return.
Further in 2020, investors were rewarded for having fixed income in their portfolio. The Bloomberg Barclays US Aggregate Bond Index was up 7.51% in 2020. These returns were above average and should not be expected on a go-forward basis. But they make the point that investors can never truly guess at how an asset class will perform.
During the crash that happened in late February, investors were faced with a dilemma. Should they sell and wait out the pandemic or stay invested?
Most experienced investors took the latter option, for two main reasons. First, unlike the 2008-2009 economic crisis, the pandemic felt different to them. While the markets would be volatile, it appeared that if a response and ultimately a vaccine was put into place, the underlying fundamentals of the market were still there.
Second, these investors recognized that trying to outthink the market typically does not end well. Even if they had guessed correctly on when to sell, it is re-entering the market that is the trickier decision. Staying invested and riding through the volatility, the hope was that ultimately in the long term the market would return.
It was a calculated decision that paid off. The US markets started to pull out of a bear market on April 7, 2020. The S&P 500 was at 2663.68 on that date. When the S&P 500 closed on December 31, 2020, it was at 3756.07.
Always Be Buying
Further experienced investors also realized another key element of achieving successful market returns is knowing when to buy. After all isn’t the old joke, buy low and sell high?
But as accurate as that mindset is, actually buying during a downturn is psychologically difficult. In a crisis, human instinct is to flee to safety. The idea of investing more money in a market that appears to be crashing can feel foolish. When the S&P 500 dropped 30% and the Russell 2000 dropped 40% respectively, putting fresh cash in seemed nerve wracking to say the least.
Investors really need to focus on their long-term plan. First, having the right fixed income allocation allows the investor to weather the challenges in these markets. Second, what many high-net-worth investors found is that rather than giving into their emotional impulses, it is always better to consistently be buying in the equity markets. A dollar cost average plan can take a lot of the heartache out of making these decisions.
Further, those who put new monies into the market – particularly at the bottom – have been rewarded for their courage with returns in the 60% range. While these are short term returns, it’s evidence that investing when others are running scared can make a difference.
Strategy Is Key
As investors look to 2021 and hope for a better year ahead, they should take these lessons to heart. High net worth investors might feel the pain of volatile markets, but their reactions are often more measured. Take a page from their strategy and focus on staying invested in the right allocation and buying consistently throughout the year.
Author: Megan Gorman
5 High-Yield Dividend Stocks to Watch
Income investors are always looking for dividend stocks with high yields that can provide them with reliable cash flow. Retirees in particular often seek stable companies that are only likely to offer modest growth, but have predictable dividends. In other cases, income investors with a higher tolerance for risk may prefer to buy shares of businesses in distressed industries while they’re down, locking in great long-term yields — assuming they recover.
These five stocks all offer high yields at their current share prices, but not all will be suitable for every income investor. Consider the merits and caveats of each before deciding whether to add it to your stock portfolio.
Medical Properties Trust (NYSE:MPW) is suitable for income investors who prioritize stability but also seek opportunities for share price appreciation. The real estate income trust (REIT) owns nearly 400 healthcare properties in the U.S., Europe, and Australia, most of which are general acute care hospitals or inpatient rehab facilities. Demographic trends suggest that demand will continue to grow for healthcare services, which are also fairly resistant to economic cycles. This business is by no means guaranteed, but it displays all the hallmarks of a company with cash flow stability.
Image source: Getty Images
Medical Property Trust’s current dividend yield of 4.97% is high, and its payout looks sustainable. The REIT distributed $0.27 per share in the most recent quarter, which was 87% of the adjusted funds from operations (FFO) reported for that period. Growth through the acquisition of additional facilities could lift income even higher, but this is already an attractive investment.
Verizon Communications (NYSE:VZ) is the largest telecommunications provider in the U.S., with nearly 100 million wireless customers. Large wireless providers are relatively stable — their businesses are unlikely to be drastically disrupted by either competitors or economic cycles. It’s extremely expensive to purchase wireless spectrum and build out the network infrastructure required to compete in the space, and that high barrier to entry favors incumbent players.
And even during difficult economic times, people are unlikely to give up their cell phone service. As a result, this is a stable income investment with some revenue growth potential due to the 5G rollout.
At current prices, Verizon stock yields 4.2% with a 56% payout ratio, indicating that the company should easily be able to sustain its current dividend. As one of the early leaders in 5G, Verizon will be well-positioned to grow its revenues by serving the rapidly increasing number of connected devices. This is unlikely to be a big growth story, but it’s a great income play with clear (albeit modest) upside potential.
Orange SA (NYSE:ORAN) is a French telecom provider, and its American depository receipts (ADR) trade on U.S. exchanges. The company has over 260 million customers in Europe, Africa, and the Middle East. The bull narrative for Orange is similar to that of Verizon. It is among the global leaders in telecom services, which is likely to remain a fairly stable business, and it should enjoy some modest benefits from the gradual adoption of 5G. Its revenue fell slightly in the first half of 2020, but returned to slow growth in Q3, despite the highly volatile economic circumstances related to the COVID-19 pandemic.
At current share prices, Orange’s dividend yields a healthy 5.93%, and its payout ratio is only 52%. Giving that it’s trading at a forward P/E ratio of only 9.3, there seems to be downside cushion built into the price in the event of competitive issues or foreign currency fluctuations that adversely impact U.S. investors.
MPLX LP (NYSE:MPLX) is a master limited partnership (MLP) created by Marathon Petroleum (NYSE:MPC) to own and operate that company’s midstream assets such as pipelines, terminals, storage for crude oil and natural gas. More so than the previously discussed companies, MPLX’s high dividend comes with a fair degree of risk. The lower crude oil prices that have prevailed during the past year have caused turmoil in the energy sector, and production shutdowns combined with reduced demand due to COVID-19 have led to a decrease in the volumes handled by midstream companies.
MPLX’s dividend yields 12.65% at current share prices, which suggests that the market might be expecting the company to reduce the size of those payments. Given that its payout ratio relative to earnings exceeds 100%, that’s a logical expectation. If energy companies continue to struggle, MPLX’s operations will certainly be impacted, so this risk is real for shareholders.
However, the company’s revenue has been roughly flat year over year through the first nine months of 2020, and it reported net profits for the third quarter. Dividends paid in 2020 have also been roughly equivalent to free cash flow through three quarters, so even the high payout ratio could be misleading. If the energy sector rebounds and pushes MPLX earnings back on course, this stock could deliver a huge windfall for income investors.
Sunoco (NYSE:SUN) is a well-known auto fuel retailer that also refines and markets petroleum products and specialty chemicals. This MLP is in a similar position to MPLX. Sunoco pays a dividend the currently yields 11.55%, but management might have to dial the payout back if the oil sector stays distressed.
However, the company reported a return to profits in the third quarter of 2020, and its free cash flows were well above its distributions. Analysts’ estimates for 2021 cover a wide range of possibilities due to the uncertainty in the energy sector, but the MLP’s dividend could be sustainable if it can meet consensus forecasts. Buying Sunoco shares would essentially be a bet on the sector as a whole, but it could provide an excellent long-term payoff to income investors who don’t mind the risk.
Author: Ryan Downie
Types of Portfolios that You Should Try
Investors often go crazy about diversification, which simply means they are not putting all their investments in one basket.
They do this to control and mitigate their risks. Generally, proper diversification results in better returns on investments.
However, diversified portfolios aren’t one and the same. There are different types of portfolios for different investors. Here are the main types of them.
Defensive stocks do not carry high risks. They are also fairly immune to broad market movements. Meanwhile, cyclical stocks refer to those most vulnerable to the underlying economic and business cycle.
During recessionary times, companies that make the basic necessities and utilities usually fare better than those that are serving fads and luxuries.
No matter how bad the economy is performing, these defensive companies will stand pat and survive. In effect, these stocks offer another layer of protection against catastrophic events.
Many of these stocks also often offer dividends, which help you minimize the capital losses you may incur.
Meanwhile, an income portfolio aims to make money through dividends or any other types of income distributions to shareholders.
These companies are similar to defensive ones, but they offer somewhat higher yields. An income portfolio can be expected to generate some positive cash flow.
You can try real estate investment funds (REITs) and master limited partnerships as good sources of income-giving investments.
Such companies usually give a huge part of their income to their shareholders. They do that for a great tax status.
You can also use an income portfolio to complement your salary or your retirement income. Find stocks that have fallen out of favor but still have dividend policy.
An aggressive portfolio invests in stocks that have high-risk-high-reward tradeoffs. These stocks usually have high beta or sensitivity to the overall market.
Most companies that have aggressive stocks are usually in the first stages of their growth and have some distinct value proposition.
Creating an aggressive portfolio needs you to be willing to find such companies since most of them aren’t typically household names.
The most common sector to find these stocks is the tech sector. Risk management also becomes very important when creating and maintaining an aggressive portfolio.
A speculative portfolio carries the highest risk among any other portfolio type. Many finance experts advise to keep your investible assets funding speculative portfolio to 10% max.
Speculative investing can be done through initial public offerings (IPO) or stocks that are seen to be takeover targets.
Technology firms that are currently researching a breakthrough product could fall into this category, as well as junior oil company that is releasing its initial production.
Building a hybrid portfolio means you pick other investments like bonds, commodities, real estate, and even art.
Using a hybrid portfolio lets you adopt a more flexible approach. Generally, this kind of portfolio will contain blue-chip stocks and some high-grade government or corporate bonds.
Moreover, a hybrid portfolio would allow you to invest in a mix of stocks and bonds and relatively fixed proportions.