Over the years, I’ve met quite a few friends and relatives who need regular income but are afraid of the stock market, especially when it plunges from time to time (like it did on Monday). They prefer to invest in income-producing real estate.
Several years ago, one of my relatives sold his business for several million dollars and attended FreedomFest to decide what to do with his cash. He and his wife attended several sessions led by investment experts on a variety of choices — income and growth stocks, offshore investing, venture capital (pre-initial public offering private placements) and real estate.
They told me that they had never owned bonds or stocks (other than their own company) and felt uncomfortable investing in them. They decided to stick with “what we know best” — commercial and residential real estate. They had invested in various rental properties over the decades and decided to stick with this strategy. They kept the properties they owned, paid off their mortgages and lived off the income stream (earning tax advantages to boot). They used the remaining funds to acquire more properties — a strip mall, a car wash, an event center, storage units, resort condos, luxury homes, mountain cabins and lodges. The husband manages the properties and the wife does the paperwork, which keeps them plenty busy.
He told me, “Most properties are paid for, producing income and growing in value — partly because we improve, upgrade and maintain our properties impeccably.”
Real Estate Investment Trusts — the Stock Market’s Alternative
Like any investment, there is a downside to investing in rental properties directly — the paperwork, repairs and upkeep, bad tenants who suddenly stop paying their rent, choosing the wrong location, changing trends, dealing with government regulations and taxes, potential lawsuits and an illiquid market. You may have to wait months if not years to sell your property in a down market.
The stock market provides a clear alternative — real estate investment trusts (REITs). All you do is invest in these publicly-traded trusts and sit back and receive rental income, usually paid every quarter, from a diversified portfolio of commercial or residential properties. No paperwork, no worries about repairs, upkeep, phone calls in the middle of the night, lawsuits, or dealing with government agents.
There are dozens of income-producing REITs to choose from, many of which pay an above-average yield of 5% or more and have adopted a rising dividend policy. We recommend one of them in Forecasts & Strategies. That one invests in assisted-living facilities, a growth industry. It currently pays a dividend of 55 cents per share every three months for an average yield of 6.1%. It has increased its dividend 10 times in a row.
Moreover, if the properties rise in value, you benefit from a rising stock price and capital gains over time. Sometimes there are tax advantages — part of the quarterly distributions may be treated as long-term capital gains. And you have liquidity. You can sell your investment at any time.
What’s not to like? Well, there are some downsides — if the REIT is mismanaged, the trust may cut or even suspend its dividend and the stock price can drop accordingly. REITs also are subject to the ups and downs of the marketplace. If you can hold on and collect your dividend checks until the market recovers, you are okay. But if you have to sell during a bear market, you could lose money.
You also can diversify into other income-producing stocks, such as energy firms, private equity, muni bonds, utilities and business development companies — see the latest issue of Forecasts & Strategies. The key is to find quality investment companies that pay high and rising dividends.
The choice is yours — be an active investor in your own rental properties, or a passive investor in REITs and other dividend-paying stocks. Both have their pros and cons.
In case you missed it, I encourage you to read my e-letter column from last week about how stocks can tumble despite strong consumer spending. I also invite you to comment in the space provided below my Eagle Daily Investor commentary.
You Blew It! Sen. Rubio Defends U.S. Sugar Subsidy as Nabisco Ships 600 Jobs to Mexico
After Sen. Marco Rubio spoke before 2,500 enthusiastic attendees at FreedomFest in early July, he flew to California to speak at the Koch Brothers conclave and immediately got into trouble defending his own home-state boondoggle — federal price supports for sugar that double its cost to domestic users like cookie makers.
Apparently, local Florida sugar cane farmers, along with Hawaii sugar producers, benefit from higher sugar prices to the tune of $1.4 billion a year through subsidies. Rubio is backing the subsidies to support his state’s sugar cane farmers, despite higher prices to Florida consumers. Meanwhile, Flo-Sun, Florida’s top sugar cane producer, makes regular campaign donations to Sen. Rubio and other politicians, totaling more than $500,000 last year. It is paying off for the sugar cane farmers when the farm subsidy bill comes up every year in Congress.
Politicians often spout the benefits of free trade and free enterprise but make exceptions when it fits their own self-interest.
According to the Cato Institute, sugar is perhaps America’s least efficient welfare program, costing consumers vastly more than it benefits farmers. Despite subsidies, the number of sugar growers has fallen by about half in the past three decades. The General Accounting Office estimated in 1995 that 1% of sugar growers captured almost half of all the benefits from the program.
As a result of the high sugar prices, candy and other food manufacturers are shifting production to foreign nations, especially Canada and Mexico. A study by Agralytica, an economic consulting firm, estimated the sugar program has cost the United States more than 120,000 jobs since 1997.
And America just lost 600 jobs in Chicago as Nabisco, the manufacturer of Oreo cookies, announced plans to move production of Oreos from that plant to Mexico. The leading ingredient in Oreos is sugar, and U.S. trade barriers currently require Americans to pay twice the average world prices for sugar.
Hotel magnate and Republican presidential candidate Donald Trump is turning the loss of American manufacturing jobs into a campaign issue. He vowed on Aug. 25 not to eat Oreos again in protest unless the cookies are made in the United States.
Good investing, AEIOU,
Presidential Fellow, Chapman University
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