REITs & dividends

Question

How for REITs and LICs differ in terms of dividends? Are they primarily about yield or growth? Should one invest in an ETF or individual REIT/LIC? How does one assess the value of either?

Answer

Hi Guy :)

Lots of questions!  Here’s a few thoughts…

—  LICs can be growth oriented or income oriented or a balance of both.  They’re all different, so it depends on each LIC and its own strategy.

—  REITs are mostly income focused, but they aren’t all high yield.  Many will focus on buying quality buildings where they expect a good increase in income over time.  Again these aren’t all the same, and each REIT has its own strategy + focus.

—  Individual REITs can help an investor pick and choose which type of real estate and management company he wants to invest in.  Some might want to avoid office REITs, or only want to invest in industrial REITs, etc.  The downside is less diversification if it doesn’t turn out well given exposure to only one or two individual firms.

—  LICs have more diversification than REITs, but less than an ETF (if we’re speaking about broad ETFs like index funds).

— There are also income / growth oriented ETFs, which have their own strategies just like LICs do.

—  Assessing the value of an income focused asset like a REIT is often done looking at the cashflow it produces (it’s yearly dividends and the portfolio’s income).  Look at the annual reports where they also disclose the NTA (net tangible assets), which gives an idea of the net value of the portfolio.

I would look at the dividend history, how reliable it’s been over time, the value of the assets right now, an assessment of what might happen over the next 10 years, and also assume that ‘the market’ is pretty good at valuing these things.  By that I mean the current value is probably somewhere close to fair value, given analysts are scouring the market looking for undervalued shares.

Anyway, hope that helps, but it’s a bit rabbit hole to go down :)

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