Preferred stocks and real estate investment trusts (REITs) are two coveted destinations for income-hungry investors.
As the InfraCap REIT Preferred ETF (PFFR) proves, it’s possible for an exchange traded fund to bring preferreds and REITs together under one umbrella. While both preferred stocks and REITs are asset classes that are historically vulnerable to rising interest rates, PFFR deserves some credit in that it’s beating the S&P 500 by about 250 basis points on a year-to-date basis.
PFFR follows the Indxx REIT Preferred Stock Index and yields a tempting 6.37% on a 30-day SEC basis, according to issuer data. That’s far more income than investors earn with broad equity benchmarks and U.S. government debt.
As alluring as PFFR’s yield is, it’s critical that companies behind high dividend assets, be they preferred or common stock, have the resources to support those obligations. It appears as though plenty of PFFR components check that box.
“We expect cash flow and dividend growth in the global listed real estate space to accelerate further in 2022, following the COVID-19 pandemic,” according to Virtus research. “Healthy underlying property fundamentals are expected to result in an acceleration in global cash flow and dividend growth. Growth will differ on a regional basis as better positioned balance sheets of U.S. real estate companies will continue to support growth through acquisitions, development, and redevelopment while ex-U.S. companies benefit from a cyclical recovery.”
Something else to consider with PFFR is that while history doesn’t always repeat, it often rhymes. As it pertains to REITs, that saying is relevant because the asset class often proves somewhat sturdy when inflation soars, outperforming equities in such market settings.
“Historically, during periods of rising interest rates and medium to high inflation, U.S. REITs have generated positive total returns and outperformed equities,” added Virtus. “In addition, the ability to raise rents, and thus cash flows, and the increase in replacement costs of the real estate itself make a strong case for REITs to perform well in a rising interest rate and inflationary environment.”
Additionally, high-quality, financially sound REITs can generate cash flow and boost dividends at a pace that can offset rising interest rates and perhaps meet or beat the pace of inflation, potentially underscoring the potency of PFFR as an income idea for the current environment.
“Additionally, the replacement value of underlying real estate should increase as land values go higher and input costs increase (materials such as steel, concrete, lumber, and architectural and contractor services),” concluded Virtus.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.