Maybe I’m a masochist.
Literally seconds before I started writing today’s dispatch, I placed an order at my brokerage firm to buy shares of a real estate investment trust (REIT)… in the face of the Federal Reserve telling the world interest rates are going higher… a state of affairs that brought pain to REITs over the last week.
Then again, that pain is why I bought.
Like I said: Maybe I’m a masochist.
But allow me to defend my masochism…
- The Fed has a crummy track record.
Yes, the Fed recently stated—yet again—that it expects interest rates to remain “higher for longer.”
Of course, this same Fed said inflation was “transitory” (I told you before inflation was even a thing back in early 2021 that it was going to be real and far from transitory). And one of the predecessors to this current iteration of the Fed claimed the subprime housing crisis was contained just before it broke down the fence and rampaged across the world.
So forgive me for calling BS on “higher for longer.”
As I’ve written in previous dispatches, the Fed cannot keep rates higher for longer because the longer it keeps rates higher, the more damage it inflicts on the federal government. U.S. interest payments have soared to about $900 billion this year, more than double what White House budget writers projected a year ago.
Debt payments now are more than 15% of the budget, and they will grow even larger this year because interest rates are higher than they were over the course of the past year.
Rates will start coming down. Soon. Probably early next year. When that happens… REITs win.
That’s because REITs are heavy users of debt to buy and manage their real estate operations. Higher rates mean higher operating costs for REITs. Lower rates mean the opposite. REIT investing now just makes good sense—assuming you’re patient.
On September 20, the Fed left interest rates unchanged but announced it has another one or two rate hikes (maybe) teed up. And it reiterated its “higher for longer” stance. So, in Pavlovian response, the Street sold REITs.
Spoiler alert: Dumb, dumb decision.
Which I why I went REIT investing myself.
- I play the long game.
What happens on Wall Street today is just noise. It means nothing across the span of time.
It means everything in the moment, however. Which is fine by me. Because I use those moments to exploit investors when they temporarily overreact to the muzak of the markets.
Is “higher for longer” truly going to alter the course of high-quality REITs?
Not likely/no.
They’ll suffer in the moment. Maybe some lower-quality REITs will suffer dramatically longer-term.
But Wall Street doesn’t just throw out the baby with the bathwater. It shoots the baby first, just to have an excuse to throw it out. I’ve seen it way too many times over my many decades of investing and writing about the markets.
I’ve learned these moments are among the very best for wading into fantabulous companies dishing up yields so fat you wonder if they need a Weight Watchers membership.
Which is the case with the high-quality REIT I snagged—a key player in the open-air shopping center sector it operates in. I won’t name it because this dispatch isn’t really a recommendation. It’s more a lesson on exploiting Street sentiment to your advantage, even when doing so might seem nerve-racking.
- I want income.
The decline this particular REIT has experienced in the last week pushed the yield well above 5%. That’s a yield I (and typically investors in general) are happy with. When I can lock in a 5%-plus yield with a rock-solid company, I’m down to clown. That’s my jam, as they say.
I’m 10 years away from full-retirement age, and for the last many years, I’ve regularly been snapping up stocks with chunky yields—REITs, MLPs, Canadian income trusts.
Moreover, I’ve told my brokerage firm to reinvest all dividends received.
It’s a win-win.
As dividends roll in, they’re automatically reinvested in shares of the company that paid the dividend. That means the next time I collect a dividend payment, it will be bigger simply by dint of the fact that I have more shares collecting those dividends. You can reflexively see that over a number of years, my payments will grow ever-larger, exactly what I want as I coast toward retirement distributions.
Moreover, as the stock price rises, I have more shares that will capture whatever capital gains accrue. (And if you don’t know, consistently rising dividends leads to persistently rising share price… I’ll back that up a dispatch I’ll post soon).
Look, buying stocks when the Fed is promising it will start swinging the axe again does take some gumption. But the thing is, the Fed’s arm strength is pretty damn weak at this point. It might have a couple of tepid swings left, at most.
And no one rings a bell to announce, “Now is the time to buy!”
I look at the bigger picture: Maybe the Fed does raise rates again. But rates are not going markedly higher from here because there are very real, and very challenging knock-on effects with the federal government, U.S. debt, and the economy writ large. Consumers have eaten through most of the post-pandemic savings that had. And higher interest rates are biting them in the ass in terms of credit card debt, which just passed $1 trillion for the first time ever.
I’m placing a bet that even as the blood continues to flow in the streets, owning this REIT at current prices will prove to be a profitable entry point over time… though I might get a bit bloody during the wait.
But as the Marquis de Sade once said, “It is only by way of pain one arrives at pleasure.”