Thank God, it’s Friday!

It’s been a crazy long week with midterm elections, market swings, and new inflation numbers coming in.

But we remain committed to delivering the best income-producing ideas every day through it all at Intelligent Income Daily.

Now that this week’s finally over, I have some exciting news to share. Next week, I’m headed to San Francisco for the National Association of Real Estate Investment Trust’s (Nareit) REITworld 2022 Annual Conference.

Nareit is an international voice for REITs and real estate companies focused on the U.S. market.

CEOs from all over the world will be there, and I have an impressive list of interviews lined up. Below are just a few I’ll be meeting with next week…

  • Charles Meyers, President and CEO of Equinix (EQIX)

  • Mark Manheimer, President and CEO of NETSTREIT (NTST)

  • Sumit Roy, President and CEO of Realty Income (O)

  • John Thomas, President and CEO of Physicians Realty Trust (DOC)

  • Tamara Fischer, CEO of National Storage Affiliates (NSA)

  • Owen Thomas, CEO and Director of Boston Properties (BXP)

  • John Albright, President of CTO Realty Growth (CTO)

And here’s the even more exciting part… I want to ask them questions that you, the reader, want answered. So, if you have a burning question for any of these CEOs, please send our team a message. I look forward to seeing what’s on your mind.

In the meantime, I’ll answer the latest questions from our Reader Mailbag. Let’s get started…

I´ve been making mostly futile forays in stocks/options and listening to everyone and their DoorDash delivery guy about their “greatest secret technique” or “magic indicator.”

Your promo video persuaded me to try Intelligent Income Investor. I fit your general profile of the worried septuagenarian. I want you to know that I dumped a handful of option and stock positions and bought seven modest starter amounts of recommendations in your portfolio.

This morning I woke to those seven positions making some money. Instead of middling winners and losers, I have a lot of winners already. By far, the best advice I´ve ever gotten. I am grateful and I´m also sleeping well during the day. – Raymond J.

Brad’s Response: Thank you, Raymond! I have not seen a REIT market like this in quite some time.

I’ve spent over 30 years of my life learning how to become an investor, and notice I said “learning.”

You see, I didn’t start out as an investor. It took me over three decades to truly grasp the concept of investing. If I could sum up the definition of investing now, it would be “learning from your mistakes.”

One of the most important lessons that I’ve learned the hard way is the concept of diversification. As much as I would like to recommend one home-run stock, I always recommend maintaining a well-balanced portfolio of high-quality income stocks.

And my favorite among those are REITs.

Right now is the best time to buy because all my favorite sleep well at night (SWAN) REITs are trading at a discount… and it won’t last long.

I’m very happy to hear you’re capitalizing on this opportunity now. As I was saying the other day, I feel like a kid in the candy shop at the moment. All my favorite candy is selling for peanuts, and I am having a grand ol’ time indulging my sweet tooth.

And as you are already aware, the recommendations I made are already paying off. Our latest recommendation, for example, is already up 5% in this volatile market.

As always, thank you for the opportunity to be of service.

You had a list of SWAN stocks, but many of these had a current yield that was quite low, most under 2%. Even with dividend growth, it appears to me this will not approach an acceptable yield for many years. Please explain. – Kenneth M.

Brad’s Response: Don’t worry, Kenneth, we will be adding other higher-yielding stocks to our portfolio.

We seek an average (portfolio) yield with a 5% handle. However, you must also remember that we are also laser-focused on total return. And much of our research is dedicated to picks that have sustainable and growing dividends.

One of my favorite sayings is, “The safest dividend is the one that’s just been raised.” What I mean is that a company that increases its dividend is positioned to deliver superior total returns.

A dividend increase is an important indication of the strength of the company. It’s a forward-looking indicator that the company will continue to deliver strong returns.

Most importantly, we recommend stocks that are trading with a wide margin of safety, which means shares that are trading below intrinsic value. So, when you combine the dividend yield, future growth prospects, and discounted valuation, you are enhancing the odds that the stock will deliver exceptional returns.

Alternatively, we always try to steer subscribers away from companies that are yielding 10% or higher, because many times they’re forced to cut this dividend. And this is a recipe for destroying shareholder value.

Our ultimate goal is to protect capital and grow it in all market conditions. And the stocks we target have historically proven to be the best for doing just that.

You write about some of your recommended REITS having a cash dividend payout of 60 to 70%. I thought they were required by law to be at least 90%? Please explain. – Howard F.

Brad’s Response: That’s a great question, Howard. I touched on this in a previous mailbag. But I’ll break it down for anyone wondering the same thing.

First, keep in mind the 90% figure you’re citing is based upon the REIT law. It allows REITs to avoid paying taxes. But it states that to qualify as a REIT, a company must payout at least 90% of its net income.

So, much of the taxable income is passed onto REIT shareholders. Most REITs, however, payout 100% of their net income.

Now, the payout ratio is a completely different arrangement, and every REIT has its own policy regarding that. This means that REITs generate earnings – or funds from operations (FFO) – and each REIT can determine how much of its FFO it will distribute to shareholders.

Computing FFO is simple:


Source: iREIT Investor

In that regard, FFO is rather like a proxy for recurring cash flow that can be used to support dividend payments. So when you divide the REIT’s dividend (per share) with its FFO (per share), you obtain the payout ratio.

For most REITs, a payout ratio of 60% to 70% is healthy; however, when the payout ratio gets closer to 100%, the potential for a dividend cut increases.

The beauty of owning a REIT is that the income being generated is based on the contractual obligation of the tenant. So we can predict – with a high degree of certainty – whether a dividend is safe (lower payout ratio) or not (100%+ payout ratio).

I hope this helps you and any other readers who may have been wondering the same thing.

That’s all I have time for today, but please do not forget to submit any questions you may have for the CEOs I will be interviewing next week.

Of course, I’ll have plenty of things to ask them. But it’s a great opportunity to learn more about their businesses, sectors, and future projections.

Happy SWAN investing,

Brad Thomas
Editor, Intelligent Income Daily