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REITs & Utilities Still Provide Great Value & Defense

August 21, 2019

Two of the most dependable market segments during the past year have been real estate investment trusts (REITs) and utilities. Through thick and thin, over the past 12 months, REITs returned 14.32%. Utilities returned 18.36%, while the S&P 500 Index returned only 4.22%.

I continue to recommend a collection of REITs and utilities inside the model portfolios of Profitable Investing, and they all continue to deliver outsized dividend income and price growth.

Bloomberg REIT (Orange), S&P Utilities (White) & S&P 500 Indexes (Yellow)—Source: Bloomberg Finance, L.P.

But are they still worth buying all over again? Yes, they are. Let me tell you why.

REITs Rule

Take a look at the market valuation for REITs. The price-to-book value for REITs on average is running at 2.74 times, which despite the price gains, is pretty much on average for REITs going back through 2010.

That’s cheap compared to the average for the S&P 500 Index, which comes in at 3.35 times.

But the important thing is that the underlying book values for REITs continue to surge by some 50.30% from the lows back in 2010. This means more intrinsic value that the market isn’t fully pricing in.

Meanwhile, the returns from actual operations of the properties remain very positive.

One of three REITs to buy now is W.P. Carey (WPC). This is a very diversified REIT focused on corporate properties on a triple-net basis, which means tenants pay taxes, insurance and general upkeep.

W.P. Carey (WPC)—Source: Bloomberg Finance, L.P.

WPC has a return on its funds from operations (FFO) of 12.80%, and its price to book is below average. It also has rising revenues and pays a dividend yielding 4.70%, which continues to rise quarter after quarter.

Then there’s a peer in the same triple-net space, EPR Properties (EPR). It has an FFO return running at 15.40% and, like WPC, its price to book is below average. EPR pays a dividend yielding 6.00% with rising distributions.

EPR Properties (EPR)—Source: Bloomberg Finance, L.P.

Then, in the buoyant healthcare properties market, I have Medical Properties Trust (MPW).

This is a net-lease company as well, but it’s focused on healthcare facilities. It has an FFO return of 10.80%, and its price to book is a very meager 1.47 times. With a yield of 5.70%, it is a good buy for income at a great stock price.

Medical Properties Trust (MPW)—Source: Bloomberg Finance, L.P.

Utilities Work

Utility stocks have outperformed the general market over the past year, too.

But the underlying values are still not overhyped. The price-to-book average for the sector is sitting at 2.14 times. And while that’s up a bit over the past 10 years, the actual underlying average book value is up some 38.09% over the past decade.

So, while prices are up, the underlying value is up significantly more.

I have several utilities in the model portfolios that make for good buys, including Duke Energy (DUK). Duke is a leading power and natural gas utility with both regulated and unregulated business units, including wind and solar.

Duke Energy (DUK)—Source: Bloomberg Finance, L.P.

It is valued at only 1.49 times book, which is below average. More importantly, its underlying book has been increasing over the past decade by some 26.14%. It pays a dividend yield of 4.20%.

NextEra Energy (NEE) is a regulated power provider in Florida with a massive collection of largely unregulated wind and solar power generation operations. The combination has fueled impressive growth over the past decade.

NextEra Energy (NEE)—Source: Bloomberg Finance, L.P.

It’s valued at a reasonable price to book of 3.02 times, but the underlying book has been increasing by 143.11% over the past 10 years, which is ahead of many of its more-staid peers.

With a yield of a bit less at 2.30%, it should be bought for further growth along with its dividend income.

All My Best,

Neil George
Editor, Dividend Digest & Profitable Investing

PS—Now that I’ve presented my reasoning for continuing to buy REITs and utilities, be sure to check out my Profitable Investing advisory for more of my market research and recommendations for further, safer growth and bigger, more reliable income.

Finally, thank you to everyone that attended the San Francisco MoneyShow. I enjoyed meeting many of my Dividend Digest readers as well as subscribers to Profitable Investing.