We’ve got three big trends—two that investors know about and one many don’t—setting us up to grab double-digit dividends in real estate investment trusts (REITs).
Now is the time to make our move. Let’s get under the hood of this opportunity and stake out a simple strategy.
Start With the Obvious
REITs have lagged since the COVID-19 pandemic, with the benchmark SPDR Dow Jones REIT ETF (RWR) returning around 17% since the start of 2020, as of this writing.
This shakes out to a 3.3% annualized return over half a decade, well off RWR’s 8.6% average yearly return since its 2001 IPO. That’s an opportunity. And if we look at the reasons for real estate’s sluggish recent performance, we can clearly see that it’s ready for a rebound.
Which brings us to our first big shift in the REIT market (or at least one corner of it)—and it’s pretty obvious. The move back toward having employees in the office.
Commercial real estate fell in 2020, as work-from-home pretty much became a legal mandate in many parts of the world. That led companies to rethink the amount of office space they needed.
Office REITs Outperform
But nowadays, return-to-office mandates and “hybrid” work structures are all the rage. You can see that with the VanEck Office and Commercial REIT ETF (DESK), in orange below, which had run ahead of RWR (in purple) by the end of 2024.
That brings us to the second reason for real estate’s poor showing in recent years (and its potential rebound now). It’s another fairly obvious one: the direction of interest rates.
High Rates Derail the REIT Recovery
In 2022, when REITs had recovered from the pandemic, they dropped again and locked in losses that would last for two years. Even now, REITs are below their peak (the S&P 500, for reference, is 30% higher than its post-pandemic high, as of this writing). The reason is simple: Higher rates raise REITs’ borrowing costs, limiting their potential.
As you read this, you might be thinking, “Well, interest rates are now moving lower, so shouldn’t real estate recover?” That’s why REITs are attracting interest, and why RWR has gone from below its pre-pandemic price point to slightly above.
And while rates will likely fall at a very slow pace in the next couple years, that’s okay because we’ve got our third trend kicking in (this is the one few people are talking about): strong demand for real estate in Europe.
According to the Financial Times, UK property demand jumped 26% in 2024, with hotels leading the way. The Financial Times quoted Tom Leahy, MSCI head of real assets research for Europe, the Middle East and Africa as saying, “The mood in the market is on the cautious side of optimistic.”
This caught my attention because I’ve heard similar comments from Wall Street analysts, who see rising demand over the last year less as a blip and more as a change in sentiment.
Our “1-Click” Move for 13.8% REIT Dividends
Here’s where we get to our action plan: We want to profit from what’s happening in Europe and America without being overly exposed to either (RWR is limited to the US), and by downplaying overpriced REIT sectors. We want a big income stream, too.
Which is why we’re looking to the actively managed CBRE Global Real Estate Income Fund (IGR). The closed-end fund (CEF) is a holding of my CEF Insider service. It has a third of its assets outside the US and has invested in places where growth is unexpected by the mainstream crowd (but really happening!) like the UK, Japan and continental Europe, which make up about half of IGR’s non-US holdings.
The fund’s US assets are largely in high-growth REITs like data-center owner Equinix (EQIX) and cell-tower “landlord” American Tower (AMT). Both are central positions, while IGR’s largest US residential holding, Invitation Homes (INVH), was born out of the subprime-mortgage crisis.
INVH has become a leading buyer of distressed homes (which it then rents out), helping the REIT return 8.1% annualized since it went public in 2017.
Now let’s talk dividends, starting with IGR’s 13.8% yield. That huge payout attracted a lot of interest, helping IGR more than double RWR’s returns in 2024, until last October.
Why the run-up? With rates falling, IGR’s portfolio, and massive payouts, attracted scores of investors. Then a market selloff in October, as the Fed slowed rate hikes, caused fickle buyers to look elsewhere.
Which brings us to today. As of this writing, IGR trades at a 1% premium to its net asset value (NAV, or the value of the REITs it holds). I expect that premium to grow.
That’s because the Fed has made it clear that it will slow its rate cuts, which is why IGR is down to just matching REITs’ performance of around 12% in a year, as of this writing.
That’s still strong, but the Fed is still going to lower rates, and as we move closer to the next cuts, expected to begin in June, IGR will likely attract more attention, prompting it to potentially outpace RWR again, while making its dividend even stronger.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Steady 8.6% Dividends.”
Disclosure: none
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