In today’s ultra-low yield, low interest rates for longer environment, investors should consider fresh approaches to income, including the newly minted ALPS REIT Dividend Dogs ETF (NYSEArca: RDOG).
RDOG, which debuted earlier this year, is, as its name implies, a real estate investment trust (REIT) ETF, meaning it provides exposure to pass through securities.
With interest rates at historic lows, the payouts on U.S. government bonds have also declined, pushing investors to look for more attractive options in the stock market such as REITs that typically deliver bond-esque returns and could potentially bring higher yields.
REITs are considered pass through securities because, in exchange for favorable tax treatment, 90% of income is delivered to investors in the form of dividends.
RDOG for Income
RDOG, which debuted in January, tracks the S-Network REIT Dividend Dogs Index. RDOG also excludes mortgage REITs to mitigate the fund’s interest rate and credit risk and it also has an avenue for ensuring steady dividend as it mandates “constituent REITs must have Trailing Twelve Month (TTM) Funds From Operations per share (FFOPS) greater than TTM Dividend Payouts per share (DPS).”
There are also tax benefits to consider with REITs and RDOG.
Pass through investments “distribute at least 90% of their earnings to investors and are therefore exempt from corporate taxes, eliminating the double taxation dividends usually see and getting profits more directly to the investor. They fall into four categories: master-limited partnerships (MLPs), real estate investment trusts (REITs), closed-end funds (CEFs) and business development companies (BDCs),” reports Money.
As an equal-weight ETF, RDOG is under-weight some of the REIT segments that were drubbed earlier this year and those that were home to a spate of negative dividend action. Likewise, the fund is overweight some of the fast-growing REIT industries that are performing well and not slashing dividends.
Some advisors recommend investors allocate 5% to 20% of portfolios to REITs and upping exposure to asset class over the near-term may be advisable because of low interest rates, above-average yields, and depressed valuations in the real estate sector.
Other REIT ETFs include the Schwab US REIT ETF (NYSEArca: SCHH) and the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR).
For more on cornerstone strategies, visit our ETF Building Blocks Channel.
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.