2023-10-16 09:00:00 ET
Summary
- Economists have been predicting a recession due to consumers running out of pandemic-era savings, but revised government data shows that households have more earnings and savings than previously reported.
- Older Americans have been able to maintain strong consumer spending due to less need to borrow, while younger Americans are struggling with high housing costs and student debt.
- Real estate investment trusts (REITs) are recommended as a starter investment portfolio, with three specific REITs highlighted: Realty Income, MidAmerica, and Extra Space.
Feeling a little cash-strapped these days?
Depending on which report you read, you’re not alone.
The Washington Post wrote on October 5 :
“For more than a year now, there’s been no shortage of economists declaring that the U.S. consumer was nearly tapped out, having run through pandemic-era fiscal largesse while inflation raged. As a result, a recession was just around the corner. Time and time again, though, American households have proven those forecasts wrong. Now, a major revision to government data on personal income and savings reveals why.”
I’ll get to that major revision and the “why” behind it shortly, but I first want to address the “no shortage” of pessimistic economists.
There have been quite a few of those, mind you, and not just in the so-called “permabear” camp. I can’t name any off the top of my head, but I’ve seen and heard their analysis nonetheless.
I’ll also be the first to acknowledge that my team and I have repeatedly called a recession inevitable. Yet no such recession has happened so far.
So we’ve either been very wrong or the recession is very delayed.
At the same time, I’m not sure if “our kind” has been the dominant voice in the news reporting cycle. From what I’ve seen, there’s been a whole lot of talk about consumers having piles of “pandemic-era savings.”
The way they make it seem, those piles are never-ending, leading to an economy that just won’t quit.
Assessing the Economic Story’s Chaotic Details
Between the federal government’s stimulus checks and the fact that nobody was going anywhere – not on vacation, not to restaurants, not to shopping malls or business trips – they built up their bank accounts. Being stuck at home for a year or more certainly helped with that.
However, those mandates ended. And people kind of went crazy making up for the lost time from there.
Restaurant spending rose. Travel spending rose. Clothing and accessories spending rose.
Moreover, a lot of that spending is still increasing at a nice clip. Look no further than Delta Air Line ’s ( DAL ) recent Q3 earnings report, which showed a near-60% jump year-over-year in profits – despite higher fuel prices and abject outrage from its U.S. customers over policy changes.
This, we’re told, is due to “excess pandemic savings.” Apparently, people really, really, really saved in 2020.
Then again, we also have stories about people tapping into their 401(k)s in order to pay their bills… not to mention credit cardholder debt now topping $1 trillion. And certain banks have recently reported that their regular customers have long-since drained the savings they accumulated.
Yet, back to that Washington Post article:
“The updated numbers reveal a consumer with some $400 billion more in earnings since 2019 along with more prudent spending than previously reported. Crucially, the revisions confirm that the massive savings buffer households built up during the pandemic remains largely intact. In terms of the numbers, Americans are socking away $100 billion a year less than they did before the pandemic, which is worrisome but not as apocalyptic as the $830 billion less that was first reported.”
So which one is it? Or could it be both?
The Benefits of Age
Here’s an added layer to the confusion: everyone’s individual stories.
Some say they’re doing great. Others say they’re really, really struggling. Which category a person falls into might depend on their age; several reports suggest.
For instance, an October 8th Pymnts article noted how:
“America has the highest percentage of older people in at least a century.
“And that fact, The Wall Street Journal reported Sunday… may have helped consumer spending to stay strong even as the Federal Reserve hikes interest rates.
“As that report notes, the U.S. senior population was 17.7% as of August, the highest on record stretching back to 1920, and up nearly 5% since 2010.”
With “less need to borrow,” the elderly are “a strong spending block.”
Comparatively, CBS reported a few weeks earlier that:
“According to a new survey from Harris Poll for Bloomberg, roughly 45% of people ages 18 to 29 are living at home with their families – the highest figure since the 1940s. More than 60% of Gen-Zers and millennials reported moving back home in the past two years, according to the poll…
“Moving back with their parents is a choice many are making these days as they grapple with high housing costs, heavy student debt, inflation, and the kind of broader economic precariousness that has increasingly weighed on younger people in recent years.”
Of course, there are some younger people thriving and some older people struggling. Neither news story gives a one-size-fits-all report.
But regardless of age, I want to provide a starter real estate investment portfolio for those with limited income. If you have a REIT-less or REIT-lite portfolio and $1,000 to spare, keep reading.
I think I’ve got something that can help you get out of the basement.
For Starters
The first thing you need to do when thinking about adding REITs to your investment portfolio is ask yourself two questions:
- How should REITs be weighted relative to other investments?
- How should they be weighted relative to each other?
As I mentioned in my new book,
“I vet REITs for a living. It’s easier for me to spot a good one versus a bad one right away. Yet I still spend countless hours fact-checking my instincts. That’s why REITs represent much more than 20 percent of my investments despite how I advise others to consider the 15- to 20-percent range. I base my higher — and, for the record, successful — figure based on my level of expertise and the amount of time I’m willing to spend expanding that expertise.”
So, what I’m telling you is that if you decide to invest $1K into REITs, make sure that you have a plan relative to your overall investment objectives, since I’m a builder (by background) I like to think of it as a “blueprint”.
Maybe the blueprint looks like this:
- REITs: 20%
- BDCs: 10%
- Midstream/MLPs: 10%
- Preferreds: 10%
- Dividend Stocks: 25%
- Tech Stocks: 10%
- Speculative: 5%
- Cash: 10%
That’s just an example.
My son (who turns 22 on Monday) is much more aggressive…
His blueprint looks like this:
- Speculative: 75%
- Cash: 25%
Believe me, I’m trying hard to train him (to build wealth), and I know he’s going to have to lose money before he really gets it.
Maybe he’ll read this article, so he can begin to grasp the margin of safety concept, which includes the power of compounding and the power of diversification.
So without further ado, let me recommend three REITs to consider.
I suggest allocating $1,000 each month to our picks (I’ll publish them on the 15 th of each month).
So a year from now, you will have invested $12,000 in 36 picks that includes REITs, BDCs, MLPs, Dividend Stocks, Asset Managers, and other SWANs.
The Monthly Dividend SWAN
Realty Income ( O ) is in a class of its own.
What sets this net lease REIT apart from the rest is as follows:
- Dividend Aristocrat with 29 consecutive years of rising dividends
- Fortress Balance sheet rated A3 by Moody’s and A- by S&P
- Highly diversified with over 13,000 properties in 50 states and Europe
- Highly Predictable Earnings: positive growth in 26 of 27 years
As seen below, analyst forecast AFFO per share of 4% in 2024 and 2025:
By investing 1/3 of the $1,000 (or $333) into O, you get around 6.5 shares (trading at $50.59).
As shown above, shares trade at 12.7x versus the “normal” multiple of 17.8x.
The dividend yield is 6.1% and that’s considered safe, especially when comparing the payout ratio of 76%.
Like most of our REIT picks right now, we’re targeting annual returns in excess of 20%, and even though rates are elevated, we’re happy to collect a meaty 6.1% dividend until shares move in-line with historical levels.
A Sunbelt SWAN
MidAmerica ( MAA ) is a blue-chip apartment landlord.
What sets this residential REIT apart from the rest is as follows:
- Unique Market Focus: captures benefits of high growth and demand within Sunbelt
- Smart home installations…expected to continue to enhance revenue in 2023
- Fortress Balance sheet rated A3 by Moody’s and A- by S&P
- Highly diversified with 276 communities and over 95,000 units
- Consistent and compounding Core FFO and dividend growth
As seen below, analyst forecast AFFO per share of 2% in 2024 and 7% 2025:
By investing 1/3 of the $1,000 (or $333) into MAA, you get around 2.5 shares (trading at $131.43).
As shown above, shares trade at 16.2x versus the “normal” multiple of 18.3x.
The dividend yield is 4.3% and that’s considered safe, especially when comparing the payout ratio of 68%.
As shown below, MAA we’ve modeled MAA to return 20% annually which makes this REIT attractive and worthy of $333 in our monthly $1k spend.
Storage Anyone?
Extra Space ( EXR ) is our final $1K pick for the month.
What sets this self-storage REIT apart from the rest is as follows:
- Scale Advantage: 3,600 properties (2.6 mm units) in 43 states
- Resilient Revenue Growth: Same-store Revenue Growth for EXR superior to peers
- Operational Outperformance: Since 2011 FFO growth of 714% vs 398% for CUBE and 207% for PSA
- Superior Dividend Growth: Since 2013 div/sh of 548% vs 345% for CUBE and 140% for PSA
- Strong Balance Sheet: Baa2 (Moody’s) and BBB+ (S&P)
As seen below, analyst forecast AFFO per share of 4% in 2024 and 12% in 2025:
By investing 1/3 of the $1,000 (or $333) into EXR, you get around 2.8 shares (trading at $118.07).
As shown above, shares trade at 15.0x versus the “normal” multiple of 20.4x.
The dividend yield is 5% and that’s considered safe, especially when comparing the payout ratio of 83%.
As shown below, we’ve modeled EXR to return 25% annually which makes this REIT attractive and worthy of $333 in our monthly $1k spend.
In Closing
There you have it.
We have now deployed $1,000 into three terrific REITs…
And next month (around the 15 th of the month) we’ll be selecting 3 more dividend-paying stocks.
And in a year, the portfolio will have $12K invested…
And in three years, with dividends and price appreciation (the power of compounding), and $1k invested monthly, the portfolio could be valued at over $50,000 (assuming 5% dividends + 15% annual price appreciation).
Now at 10x (or $10,000 per month invested) over three years, and using the same assumptions, the basket turns into over $500,000.
Now, these are assumptions, so there’s obviously no guarantee that shares in these stocks will return 20% annually.
However, by selecting the highest quality dividend stocks with a margin of safety, you are essentially “ planting trees that other men will sit under ” (Ben Graham). These words should become ingrained in your investing mindset,
“The intelligent investor realizes that stocks become more risky, not less, as their prices rise—and less risky, not more, as their prices fall. The intelligent investor dreads a bull market, since it makes stocks more costly to buy. And conversely (so long as you keep enough cash on hand to meet your spending needs), you should welcome a bear market, since it puts stocks back on sale.”
Happy SWAN Investing!
Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.
For further details see:
How To Invest $1,000 Per Month