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Bargains for More Income and a Better Portfolio

October 08, 2020

Technology is one of the leading segments of the market.

But with little to no dividend yield, technology is only part of an overall portfolio strategy that should also include some value stocks with ample income to carry you through the tech plunges that happen now and again.

And in my Profitable Investing service, what continues to work as part of an overall portfolio strategy is to have plenty of quality real estate investment trusts (REITs) and utilities.

Valued Real Assets

Both REITs and utilities have tangible real and hard assets that are difficult or impossible to replicate specifically. Land is land, and they aren’t making any more of it. And major power plants and transmission equipment can’t just be replicated in local and regional markets.

Yet, the stock market has both of these sectors on the cheap this year. The underlying weighted average book value of all of the REITs inside the Bloomberg US REIT Index is at $111.97. This is up by more than 10% over the past five years.

But the stock market has the average price to intrinsic (book) value at a mere 2.39 times. That’s down significantly from just earlier this year.

Bloomberg US REIT Index Price to Book & Book Value—Source: Bloomberg Finance, L.P.


Now of course, just like the underlying real estate, there are lots of REITs in the wrong properties during the COVID-19 pandemic. Hospitality and retail are no-go places.

Meanwhile, we’re in some very profitable and must-have properties. Alexandria Real Estate Equities (ARE) owns labs that are mission-critical right now. Digital Realty Trust (DLR) has the data centers that were in demand before lockdowns and now for cloud demand that has only gotten stronger.

Hannon Armstrong (HASI) is a leader in ESG finance. Life Storage (LSI) has the heads-you-win-tails-you-win properties in self-storage. In good times, people buy more stuff. In bad times, they have to move and store that stuff.

Medical Properties Trust (MPW) owns all of the medical services properties with tenants paying up and staying paid-up in their leases. And in logistics, warehouses are in evermore demand with more remote shopping and supply lines aiding Prologis (PLD).

W.P. Carey (WPC), even with parts of its portfolio in commercial properties, has arguably the biggest and most diversified portfolios, including government properties. And it has the proven history of boosting shareholder payouts quarter after quarter for decades.

They all make for bargain buys right now, and they come with dividend yields well above the general market average.

But the broad index investment to start with is in the Vanguard Real Estate ETF (VNQ). Since coming to the market, it has posted a total return of 216.7% for an annual equivalent return of 7.5%. With a dividend yield of 3.9%, it provides lots of income, which means it pays you to be patient during challenging market and economic conditions.

Valued Essentials

Not one bit or byte of Silicon Valley wizardry will move, light up or generate a patent royalty without the essential services companies, principally power utilities. And it’s the essential services that are there during economic boom or bust times, keeping the lights on, the gas flowing and the water delivered and taken away.

All of these companies are very asset-intensive. So it is interesting to look at the underlying intrinsic (book) value of all of those assets, as measured and tracked by S&P and its Utilities Index.

The weighted average intrinsic value of the stocks in that index, including all of the must-have assets, are currently sitting at $144.61, up significantly over the past five years. And over the trailing year, they’ve gained some 4.3%.

Yet, the stock market’s price to intrinsic value is only 2.02 times, a fraction of the S&P’s general market index and more so for the technology sector stock average. Over the past year, that value is down by some 13.4%, making for a very good value buy right now.

S&P Utilities Index Price to Book & Book Value—Source: Bloomberg Finance, L.P.

Two leaders in the utilities market are NextEra (NEE) and Xcel Energy (XEL).

But overall, the proof of value now and for longer-term gains and income is shown in the Vanguard Utilities ETF (VPU). Since coming to the market, it has returned 339.7%, which equates to an annual equivalent of 9.3%. That’s not only good and reliable, but it bests the S&P 500 Index by an ample sum for the same period.

And with its yield of 2.8%, which continues to increase in distribution annually over the past five years by an average of 4.3%, it makes for a reliable source of portfolio income that also bests inflation.

The bottom line is that a portfolio is just that; a collection of investments meant to provide growth over time and income along the way during all sorts of economic and market conditions.

REITs and utilities are bargains right now, and you should use the opportunity to buy and add to those segments in your own portfolio.

All My Best,

Neil George
Editor, Income Investor’s Digest & Profitable Investing
Author, Income for Life