Dividend Investing and REITs

There are more than a few people out there on social media, or even respected money news and financial analyst websites and publication who hate dividend investing. Dividend investing is for people who are irrationally conservative and growth investing always wins in the end, is what they say.

Of course, part of the reason they say that dividend investing is bad is because they don’t fully understand it, or they do and are choosing to focus only on trendy, but ultimately underperforming types of dividend investing.

REITs and Dumb Dividend Investing

On the internet, dividend investing is, as are so many other things, dragged to the extremes. The idea of only investing in the most boring of stocks with dividends like utilities and maybe banks is, not surprisingly, a recipe for underperformance, even if it is less risky. Likewise, the starry-eyed adulation of fund, ETF, or stock paying an astronomical dividend, attract droves of followers who assume that their sub-reddit has found the holy grail that all other investors are too foolish to see.

Dividend Investments Hype

Any investment that has a good run will develop a following who believes that it is a never ending good run and getting in now is as good as getting in back when the run started. Regulators require investments and professionals to say, “past performance is not an indication of future results,” for a reason. Last year’s number one investment won’t necessarily be this year’s. It might not even be top 100.

Oh, baby. (O) – Realty Income Corporation

Until recently, you could hop on Twitter, Facebook, Threads, or any of the others and within a few minutes of scrolling find someone extolling the virtues of O, the Realty Income Corporation. I have never bothered to look into whether or not they just took O as their stock ticker because it was available, or if there was a reason for it, but people love that O.

Realty Income calls itself The Monthly Dividend Company. It does not lie. It pays a dividend every month and is part of the S&P 500. O is in no way a scam. It is a legitimate company structured as a REIT. An REIT is a Real Estate Investment Trust. The short-short version of what that means is that the company owns and manages numerous real estate properties (over 15,000 according to the company’s investor information).

The idea of a REIT is simple. Just like a mutual fund, it pools together investor dollars and then uses that fund to purchase and run a diversified portfolio of real estate. There is no way you can own a duplex in Phoenix, and an 5-story apartment building in Minnesota, let alone run them both, but O can. So, you invest in O, and it’s like owning a part of a ton of different real estate.

O passes the profits generated by its real estate back to investors in the form of a dividend. Along the way, the company itself is value on the open markets by investors who decide what they think O’s portfolio is worth, as well as how much that income is worth.

Less experienced investors get caught up in they hype of monthly dividend payments. Since most people structure their expenses by the month, the idea of getting income every month just fits into your life of monthly expenses. Therefore, if you could generate enough passive income from your investments in O, which would come as monthly payments, you could stop working and retire forever.

It’s a great dream, and a possible one. Just be sure to do the math. At say 7% dividend yield, you would need around $1.5 million to generate $10,000 a month for 30 years, and closer to $1.7 million to generate $10k a month for life. There is, of course, the matter of capital appreciation. Assuming Realty Income is good at what it does, eventually the value of it’s shares would rise over time. But, real estate (at least in the REIT variety), doesn’t always keep up with the S&P 500. This is where the derision of dividend investing begins.

Highest Dividend Paying Stocks

Of course, there is more than O. Every so often, you’ll see a highest dividend paying stocks list floating around. Depending upon the methodology, chances are you’ll see more than a few real estate investment trusts hanging around that list. Just remember, last year’s hot potato won’t necessary be cold fries this year.

You’ll also see small companies organized to be traded on the open markets. Master limited partnerships, specialty companies, and, of course REITs.

One list contains NuStar Energy (NS). It’s an (MLP) that invests and operates transportation and storage facilities in the energy sector. As you can imagine, this company’s fortunes are directly tied to the ups and downs of the oil industry, but it is throwing off a crazy dividend. Update: NuStar is now a privately held company and no longer trades on the NYSE or anywhere.

Ares Capital is a business development company or BDC. It pays over 9% in dividends. Of course, you won’t find a lot of capital appreciation here.

You don’t have to be a barely known company to pay a big dividend and draw the scorn of the index funds only / capital appreciation is the only worth investment style crowd. Verizon (yes, that Verizon) currently yields over 6.5% here in the Summer of 2024. Of course, part of the reason for that is the stock price swoon. The lower stock price is responsible for a lot of the dividend yield at Verizon.

Will the company ever turn around and see an improving stock price? I don’t know, but Verizon will pay you 6.5% to hang around and find out.

Text Book Dividend Investing and the Real World

More than a little of what they teach at Harvard Business school and other economics and business programs around the world is out of date. The idea of dividend investments as stogy, safe havens for little old ladies and orphans on a fixed income is one of those ideas. Yes, there are plenty of no-nonsense, pay the dividend utilities still out there, but there are a lot of different options as well, if you know what to look for.

Lower prices raise the dividend on any stock, not just traditional dividend stocks. If you compare the dividends a stock pays to what you can earn in a savings account, there are a lot of investments out there that pay you just as much, or almost as much, while offering you the upside of an improving company or rising market.

McDonald’s paid 3% recently, and would make a solid win on its recent price increase. Of course, you can wait longer and keep earning your 3%. Target (TGT) is also yielding 3%, and IBM will pay you 3.5%. None of these pay 8% or 10% or whatever, but they pay a nice income to sit around and wait for them to rise 30% or 50% or just double.

None of these companies are Dividend Kings or whatever, but that doesn’t mean you should ignore their dividends while investing. In fact, finding great stocks for long-term capital appreciation, after limiting the pool to those paying a nice dividend is easier than you think.