The real estate sector is sprawling. As such, some segments proved more vulnerable to a pullback caused by the coronavirus pandemic than others. That includes office real estate investment trusts (REITs). While those REITs aren’t all the way back, a rebound by the group should bolster exchange traded funds, including the ALPS REIT Dividend Dogs ETF (NYSEArca: RDOG).
Adding to the case for RDOG is that it has avenues for mitigating dividend duress. 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).
“Although we expect muted demand growth, the office real estate investment trusts and commercial real estate services companies we cover represent compelling investment opportunities,”
writes Morningstar analyst Yousuf Hafuda. “Investors have allowed negative headlines to drive undue pessimism regarding the industry.”
The real estate sector is lagging behind the broader market, but the good news in that scenario is that some compelling discounts are currently available, including among office REITs.
Reasons for RDOG Allocations
Right now, real estate is undergoing somewhat of a shift due to the Covid-19 pandemic. With more companies settling into the work-from-home dynamic, less office real estate space is needed and more homeowners are increasing their home office space.
Fixed income investors know that yield is hard to come across these days—unless investors are willing to take on more risk by accepting more duration in safe haven government debt, opting for high yield, or looking at opportunities overseas—to name a few. On the other hand, RDOG offers an alternative to those prosaic income-generating assets.
Despite increased working from home, office REITs aren’t going anywhere and work from home’s impact on the group may be overstated.
“The office is hardly facing the threat of obsolescence, despite hyperbolic proclamations suggesting as much. Although we expect some increase in fully remote work and a modest increase in hybrid remote work, the office provides functions that cannot be fully replicated in a digital environment,” according to Morningstar.
Other REIT ETFs include the Schwab US REIT ETF (NYSEArca: SCHH) and the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR).
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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.
