This 9.9% Payer Is the Most Overlooked Dividend Trade of 2022


Most people don’t know it, but real estate has messed up stocks in the long run and it’s poised to win again in 2023.

And we dividend investors are lining up neatly to raise money, thanks to a fund that delivers a blockbuster 9.9%, that’s the perfect play here. I’ll drop the name and ticker in a minute.

You read that right: real estate is doing outperform stocks in the long run – and certainly not in the slightest! It is clear as can be in this comparison between the SPDR Dow Jones REIT ETF (RWR .)

the index fund for publicly traded real estate investment trusts (REITs) and the S&P 500 over the past 20 years.

Please note that this period also included the COVID-19 crash and the subprime mortgage crisis, which, of course, turned homes upside down. No problem. REITs – publicly traded companies that own everything from warehouses to apartment buildings – immediately floated back to the surface!

The key to REITs’ appeal is that they’re “pass-through” investments: they collect rent checks from tenants, shave enough to keep the lights on and keep the buildings clean, and give the rest to us as dividends. The result is a greater income stream than paying common stock: The typical REIT returns 3.2%, doubling the S&P 500’s miserable 1.5%.

But even though RWR has crushed stocks, we do not wants to go the passive ETF route here. First, RWR’s 3.2% efficiency is nowhere near enough to make our hearts beat faster. And second, with REITs (as with pretty much everything these days), having a smart, responsive manager is critical.

The proof is in RWR’s performance over the past three volatile years, compared to that of the closed-end fund (CEF) we’re going to talk about today, the CBRE Global Real Estate Income Fund (IGR). IGR throws out that huge 9.9% payout I mentioned a second ago (and it pays you monthly, no less)!

The main reason for this comes down to IGR’s expert portfolio managers, who have deftly navigated the local markets they know best. That’s the key in real estate, which we all know is really just a collection of small markets that all behave differently at one point or another.

And when it comes to real estate, the fund manager, CBRE, has no shortage of knowledge: in addition to IGR and private-investor funds, it manages real estate, operates a brokerage and invests its own money in real estate. The company has 80,000 employees in more than 100 countries, giving it a global perspective and relationships abroad that no algorithm-led ETF can match.

CBRE has used that knowledge to smartly lean IGR’s portfolio heavily toward the US (68%), a cautious move as the US economy continues to grow at a healthy pace, with inflation starting to pick up and consumer spending (to not to mention employment).

But buying a well-managed real estate fund isn’t just about management’s research power and access to information, it’s also about diversification, which is especially important in real estate.

For example, IGR invests in more than 80 REITs, which themselves own hundreds and sometimes thousands of properties. And like the many other REIT funds that do the same, it doesn’t notice when a bum tenant stops paying rent, because there are thousands of others who do.

For example, right now, IGR’s top positions include REITs that own a wide variety of properties. Crown Castle International (CCI), for example, owns more than 40,000 cell towers around the world, plus 115,000 “small cells” that increase local network capacity in larger cities; Prologis

owns 4,732 warehouses around the world; and residential REIT Invitation Houses (INVH), rents out more than 85,000 single-family homes.

So we’ve got a lot of diversification here already, and that’s just from three of IGR’s holdings!

Another oft-overlooked reason to consider REIT funds is that both these funds and REITs themselves have access to cheaper leverage than you and I. Right now, for example, rising mortgage rates are a big problem for individual investors who own rental properties, but not so for REITs:

Mortgage payments go through the roof

With interest rates reaching 5% earlier this year and staying at that level, home loans have soared. But the interest rates for REITs are much lower, and many currently have borrowing costs on the books of less than 3%.

REITs enjoy lower rates because they are professionally managed and spread across many real estate properties, so they are at lower risk than your typical individual real estate investor. This is one of the reasons REITs actually have a pretty consistent track record of posting positive returns during periods of rising interest rates.

This chart is based on a study by NAREIT, a REIT research and data firm, and it clearly shows that REITs typically make profits during periods of higher interest rates. This is because their lower borrowing costs shield them from the trend somewhat. In addition, periods of rising interest rates are usually accompanied by a strong economy (as is the case today). That means greater demand for real estate from REITs, allowing REITs to raise rents. These increases are much greater than the increase in borrowing costs due to higher rates.

Buy IGR as “Discount Momentum” Builds

Finally, let’s talk about the discount of IGR to the NAV, or the difference between the market price and the value per share of the portfolio (this measure is unique to CEFs). At the moment, that discount is small, meaning IGR is more or less valued fairly.

The trend here is clear: IGR’s discount is moving into the premium area – the question is how far. If that happens, it will give more thrust below IGR’s share price. And of course you get that healthy 9.9% payout (paid monthly) all the time.

Michael Foster is the principal research analyst for: Contrary Outlook. For more great income ideas, click here for our latest report »Indestructible Income: 5 bargain funds with safe 8.4% dividends.

Disclosure: none