For the past few years, the zero-interest-rate approach used by the Federal Reserve has caused a dilemma for investors in search of yield. Traditional income securities like Treasuries, municipal bonds and CDs simply did not offer enough income to meet investors’ needs, so they increasingly looked first to blue-chip stocks and then real estate investment trusts to provide needed income.
This approach has worked out pretty well for several years. In the aftermath of the credit crisis, most analysts were soured on real estate-related investments, including REITs — Wall Street downgraded them and expected little in the way of revenue or earnings growth. However, as many of them recovered much quicker than analysts expected, these stocks moved up quickly in Portfolio Grade rankings to become “buys” or even “strong buys.”
In addition to finding a much-needed source of income, investors also enjoyed strong appreciation as REITs exceeded the Streets expectations and began to attract heavy institutional buying.
Unfortunately, it looks like REITs’ ride might be coming to an end.
In the past month, we have downgraded several REITs as their Portfolio Grader rankings have begun to slip. Two REIT “buy” calls have now slipped to a “C” grade — or “hold” ranking — by our stock ranking tool this week.
American Capital Agency (NASDAQ:AGNC) has been ranked either a “buy” or “strong buy” for the past year. Although the stock has not appreciated much, shareholders have enjoyed a gain of 15% just from dividends, and shares currently yield north of 16%. The downgrade to “C” does not mean it is time to rush to sell your shares, but certainly don’t buy any more.
Simon Property Group (NYSE:SPG), which has a much more modest 2.6% yield, has rewarded investors with a total return of around 20% in the past year, but it too is a “hold” now as its Portfolio Grader ranking has fallen back to a “C.”
Meanwhile, Vornado Realty (NYSE:VNO) and Annaly Capital (NYSE:NLY) have joined a growing list of REITs that are ranked either “sell” or “strong sell” by Portfolio Grader.
Vornado Realty has fallen from a “C” to a “D,” and thus it’s time for investors to get out of this 3.4% yielder. High-yield mortgage securities REIT Annaly Capital also has seen its grade fall to a “D” after a poor earnings report — that fat 12% dividend payout might be in danger as interest margins are compressed and earnings have declined.
While REITs have given investors a great ride, providing solid capital gains as well as income, the sector — much like the rest of the market — is seeing its advances narrow. A few select REITs still carry “buy” rankings from Portfolio Grader, but the list of those who no longer qualify is growing fast.
If you are an REIT investor, review your portfolio immediately and part company with those stocks whose fundamentals are lagging.
Louis Navellier is the editor of Blue Chip Growth.