With interest rates falling and investors embracing defensive asset classes and sectors, it is not surprising that the real estate sector is getting a boost. Investors may want to consider integrating the quality factor with real estate exposure via the FlexShares Global Quality Real Estate Index Fund (NYSEArca: GQRE).
GQRE targets the Northern Trust Global Quality Real Estate Index, a fundamentally-weighted index that focuses on commercial and residential REITs. Mortgage REITs, real estate finance companies, mortgage brokers and bankers, commercial and residential real estate brokers, and real estate agents and home builders are among the securities excluded from the index.
GQRE is up almost 15% year-to-date and yields nearly 3%. The quality factor is a point of emphasis for a growing number of strategic beta ETFs. Though there has been debate surrounding defining quality as it pertains to factor-based investing, quality companies and dividend-paying stocks often go hand-in-hand because those dividends are seen as signs of stable earnings and thoughtful management.
“Besides being seen as a haven with less exposure to the trade conflict, REITs are being helped by falling interest rates. REITs, which are required to pay out at least 90% of their taxable income in dividends, yield about 4% on average, nearly double the S&P 500’s 2% yield,” reports Lawrence Strauss for Barron’s.
Why It’s Important For Real Estate Investors
Real estate investors also enjoy attractive dividend yield-generation, which provides an alternative to bonds as a source of income. The sector offers yields that exceed sovereign and corporate investment bonds. Unlike bond coupons, real estate dividends can grow over time, which is invaluable in periods of high growth and inflationary environments. Additionally, due to real estate’s long-term leases, they provide a more reliable source of dividends than other equities.
GQRE also features significant ex-US exposure, a trait that should serve the fund as a slew of central banks besides the Federal Reserve consider lowering interest rates. While REITs are trading at the higher end of historical valuation ranges, the group is generating robust cash to support dividend hikes.
“Another factor working in favor of many REITs is their ample cash flow to pay and increase their dividends. The dividend payout ratio for the group, as measured by the adjusted-funds-from-operations metric, is about 75%, below its historical average of just under 80%, according to Citi Research,” reports Barron’s.
For more information on the real estate investment trusts segment, visit our REITs category.
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.