Inflation is seizing the conversation again. September inflation was up to 5.4%, an increase from the 5.3% in August. Labor costs are rising, supply chain issues are jacking up prices, and an energy crisis is causing fuel costs to surge out of control. Many investors are looking for a way to button up their portfolios to withstand what could be a longer than anticipated inflationary period.
There are many classic inflation hedges, but REITs marry two great inflation blunting superpowers: dividends and real estate.
Dividends operate as inflation protection because they tend to outpace inflation. Companies will be paying out dividends with goods they are selling for market value, so if the prices of those products surge, so too do the dividends. Because dividends are often looked at as a sign of financial health, companies have plenty of incentive to keep their rates ahead of inflation. This is why dividend growth ETFs like SmartETFs Dividend Builder ETF (DIVS) are useful to have in your back pocket.
Real estate is another critical hedge against inflation. Property values skyrocket in times of high inflation. As companies go to build new buildings, the price of the materials needed for the construction increase, driving the value up further. That same increase in material prices also drives up the value of existing buildings, as more expensive construction means that buildings that already exist have greater value. Rents soar to meet market demand, further driving up the value of real estate. This in turn creates more competition for tenants, because the high value of real estate means that more people and companies are seeking to rent rather than own their property.
REITs Are the Ultimate Inflation Shield
REITS combine dividends with real estate, making them a vital component of any portfolio hoping to navigate inflationary periods. Because REITs are required to dole out 90% of their earnings as dividends, they tend to be investing income superstars. Merge that with the fact that the these companies are invested in real estate — an inflation hedge itself — and you can see why REIT ETFs like the Vanguard Real Estate ETF (VNQ), the VanEck Mortgage REIT Income ETF (MORT), or the iShares Mortgage Real Estate ETF (REM) can keep a portfolio thriving even through the hardest inflationary stretches.
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