Morningstar: REIT valuations are 'just nuts'

Morningstar: REIT valuations are 'just nuts'
In the search for income, investors are piling into dividend-paying REITs, driving up prices and poleaxing yields. How crowded is it in there? Said one Morningstar analyst: Property trust valuations are 'just nuts.'
MAY 21, 2012
By  JKEPHART
Dividend investing has been in vogue for some time now. One area of the dividend universe that investors may want to steer clear of, however, is real estate investment trusts. “Today we're seeing valuations that are just nuts,” said Josh Peters, editor of the Morningstar DividendInvestor newsletter. The increased valuations have driven down yields on REITs, which are primarily coveted for their income feature, to spreads above the 10-year Treasury that are overall “scary,” Mr. Peters said. “With Treasuries at 2%, you would expect REITs to be yielding 6, 7, or 8%," he said. "But no, you're getting 2 to 3%. The $2 billion SPDR Dow Jones REIT ETF Ticker:(RWR), which tracks an index of the largest U.S. REITs, has a yield of 2.8% today. Individually, there are a number of REITs trading in the 4% range, but the big names, such as Simon Property Group Inc. Ticker:(SPG) and Public Storage Ticker:(PSA), are yielding around 3%. The companies are being priced like growth vehicles, when, in reality, they're not great at growth, said Mr. Peters. “Investors need to think about REITs as income machines,” he said. “They can be great sources of total return too — if you can get them at the right price.” One sector Mr. Peters does like is health care, particularly pharmaceutical companies, which he said are currently undervalued and less sensitive to interest rate movements than REITs are.

Latest News

Retirement delays, Social Security fears prompt advisors to rethink income strategies
Retirement delays, Social Security fears prompt advisors to rethink income strategies

Concerns about outliving savings and healthcare costs are reshaping how "Peak 65" Americans and advisors approach income planning.

Merrill Lynch on the hook for $3.7M after clients claimed sale of unsuitable private equity
Merrill Lynch on the hook for $3.7M after clients claimed sale of unsuitable private equity

Some investors recently have seen million dollar plus decisions by FINRA arbitration panels involving complex products decisions go their way.

Barred ex-Merrill Lynch advisor arrested in alleged $2.6M theft of former Miami Dolphin Pro Bowler
Barred ex-Merrill Lynch advisor arrested in alleged $2.6M theft of former Miami Dolphin Pro Bowler

Former advisor Isaiah Williams allegedly used the stolen funds from ex-Dolphins defensive safety Reshad Jones for numerous personal expenses, according to police and court records.

RIA moves: Modern Wealth tops $8.5B AUM as Aspen expands in Connecticut
RIA moves: Modern Wealth tops $8.5B AUM as Aspen expands in Connecticut

Modern Wealth's latest deal for a California-based fee-only RIA marks its fourth acquisition of 2025.

Empower defends private market access in 401(k)s in response to Warren scrutiny
Empower defends private market access in 401(k)s in response to Warren scrutiny

Sen. Warren has warned of private market investment risks due to opacity, illiquidity, and past regulatory issues.

SPONSORED How advisors can build for high-net-worth complexity

Orion's Tom Wilson on delivering coordinated, high-touch service in a world where returns alone no longer set you apart.

SPONSORED RILAs bring stability, growth during volatile markets

Barely a decade old, registered index-linked annuities have quickly surged in popularity, thanks to their unique blend of protection and growth potential—an appealing option for investors looking to chart a steadier course through today's choppy market waters, says Myles Lambert, Brighthouse Financial.