Before that irritating holiday interruptus, this pathetic blog dropped the names of a few yieldy assets. Hope you were paying attention. This is what 2012 will be all about.
No, there will not be an economic apocalypse next year. No 2008 rerun or Lehman II. But markets will be volatile, choppy and dramatically unpredictable even though they’ll end the year higher. Perhaps arrestingly. In any case, your mutual funds will likely flounder and your equities flail. More than ever, income will be critical, especially for all the wrinkly people this site so loves to torment.
Next year, your first love should be liquidity. Financial assets will outperform real ones, including precious metals and certainly real estate. It could be the last period in which people talk about lost years in America, imminent collapse in Europe or global reckoning. A year from now I’d bet we’re all in a much better frame of mind, except for those who still have their net worth locked in illiquid bricks and mortar.
So if you don’t own assets that (a) are instantly convertible into cash, (b) far less volatile than stocks, (c) not correlated to equity markets and (d) pay you to own them, it’s time to start getting some. This is why I’m hot on preferreds, for example, which all this year paid their owners a yield of 5% or better, let them collect the dividend tax credit (and pay 80% less than with a GIC), and remained rock solid in value even as stocks soared and melted.
Of course, you need to get the right kind of preferreds, issued by the right companies. Personally I like perpetuals with fixed dividends, which just keep churning out tax-efficient income. And if they’re ever recalled (an unusual event) by the issuer, you’ll probably get a capital gain to boot. The risk is a sharp rise in interest rates, which would lower the capital value but not affect the payments. The odds of that happening are slim, but if it does take place, preferreds will cost less and I’ll be backing the Hummer up at the loading dock.
But this isn’t about preferred shares. If you want, I will devote an entire, sensuous, throbbing post to that topic. But not today. So keep your pants on and let’s talk about REITs.
Besides preferreds (and bonds, and exchange-traded funds), every 2012 portfolio should include real estate investment trusts. I’ve already given you the names and recent yields of a number of the top contenders, which coughed up yields of 6-12% this year, when most investors needed a magic touch just to break even. There’s every reason to believe this will continue.
To counter the idiot comments about to be written, remember that REITs do not buy houses, strip malls in Red Deer or triplexes in Etobicoke. They’ll be largely unaffected by any major correction in residential real estate values. Instead, they gobble office towers and complexes, sprawling suburban malls, chains of retirement homes or tens of thousands of rental apartment units. As such, REITs are all about one thing. Cash flow. They buy income-producing real estate using the usual leverage, collect rents and distribute cash to unitholders.
Last year major Canadian REITs jumped in value as group by almost 20%, and at the same time spit out an average yield of 5.5%. Over the last decade they’ve doubled the performance of the TSX, and trumped the increase in house prices by an even wider margin.
Unlike owning an actual piece of real estate, REITs are totally liquid. Most trade on equity markets and can be bought or sold with a call or a click. Unlike your investment condo, you know exactly the price of your REIT every hour. When you buy or sell, there may be a trade fee of a few bucks. When you unload your $300,000 condo, it’ll probably cost you $15,000.
You don’t need to get a mortgage to buy REITs, purchase mortgage insurance, try to find a tenant who won’t glue tin foil to the windows, or struggle with negative cash flow. There’s no property insurance to buy or land transfer tax to pay. No painting. No toilet floats.
REITs are cash flow positive and pay regular distributions. You don’t need to hire a realtor, suffer through showings or have morons walk through your asset in order to sell it. In fact, you can even buy an exchange-traded fund which owns a mess of REITs (XRE), giving massive diversification across everything from hotels to bank towers.
There are risks (as always), but they pale in comparison with buying a condo in Toronto or Vancouver, especially one yet to be built. Financial markets could start selling off, taking REITs with them. But unlike in a real estate correction – when you might wait months (or years) to unload your property – trust units can be sold immediately with the cash hitting your account in three days.
But the greatest difference between real estate and real estate trusts is this: properties cost you, while REITs pay you.
Why would you not want to own this stuff?
Especially with what’s coming.