REITs came into 2020 hitting on all cylinders with high valuations and a lot of optimism. Then COVID-19 pushed them off the track, recalls Rida Morwa, income expert and editor of High Dividend Opportunities.
As value investors, who are looking to buy low in order to collect a higher than average yield, this is exactly the kind of situation we look for — durable investments that have a relatively low price compared to the broader indexes.
REITs are positioned to soar as they enter into a significant expansion phase that will be fueled by access to dirt cheap debt and the sheer amount of capital that will be invested in rebuilding the economy.
With the prospects of a vaccine being distributed in early 2021, companies are going to switch from hunkering down to weather the storm to trying to beat their competitors and gain more market share.
One of the best ways to take advantage of sector-wide movements is to invest in a closed-end fund (CEF). Two of our favorites in the sector are Cohen & Steers Quality Income Realty Fund (RQI), yielding 7.9%, and Cohen & Steers REIT & Preferred Income Fund (RNP), yielding 6.7%.
Cohen & Steers is one of the best managers that's active in the REIT sector and has an impressive track record. Investors benefit from their expertise. It maximizes shareholder returns by overweighting solid REITs and taking advantage of unjustified pullbacks.
An added bonus is that RQI is currently trading at a 6.7% discount to NAV while RNP is trading at an 5.3% discount to NAV. This means that it is cheaper to buy either fund than it would be to recreate their portfolios from scratch.
The main difference between the two is that RQI is focused on common equities, while RNP has close to a 50% allocation to fixed income, primarily preferred equity.
So RNP is less volatile and is more suited for conservative investors. RQI's higher allocation to common stocks makes it more volatile, but provide more upside potential as the sector soars.
Over the long haul, these two strategies have resulted in similar total returns with RNP being less volatile than RQI. Since RNP has a lot more holdings than RQI, both CEFs can be held together, even though it would result in some overlap among REIT equities. With REITs positioned to soar in 2021, that's a positive.
