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2 REITs Worth Considering for 2014: WPC, VNQ

A focus on good names with earnings power to start 2014


The New Year started off with some duds in the market before making a bit of a comeback. That’s the first time since 2005 that the S&P opened the year with three straight losing sessions—and only the second time in the past 20 years.

Does it mean anything?

My guess is that this interesting piece of statistical trivia doesn’t really mean much, except one thing:  If you were counting on another year of blistering gains for the U.S. stock market in 2014, you’re probably in for a disappointment.

At the end of 2013, the S&P index was quoted at a lofty 19.6X reported earnings for the past year.  Before the bubble era of the late 1990s, the market had never sold significantly above 20X on this basis—even in 1929, 1987 or during the halcyon days of America’s industrial might in the early 1960s.

So unless you believe we’re headed into another 1990s-type bubble, your working assumption should be that stocks will advance no faster, in 2014, than corporate earnings.

On that front, the outlook is decidedly cloudy.  Yes, it’s true that Wall Street analysts are calling for earnings at the S&P 500 companies to grow 13% in 2014.

However, these chaps aren’t known for their stellar forecasting abilities.  Eighteen months ago, the analyst crowd was projecting that the S&P would earn $31.28 in 4Q13.  The latest estimate is just $28.17—10% lower.

We also know that many more companies are cutting their public earnings guidance than raising it.  (See the unnerving story here.)  While it’s possible that earnings growth will quicken in the back months of 2014, there’s little evidence of acceleration yet.

Until this picture changes, I advise you to proceed with modest (single-digit) expectations for the market as a whole.  Focus, instead, on sectors and individual companies that the thundering herd may have unfairly neglected in 2013.

Look for names with good earnings power at discounted prices.  Already, in the early going, investors seem to be reconsidering their hostile view of real estate investment trusts (REITs).  If you’re sitting on too much idle cash, start by putting some of it to work in these REITs.

W.P. Carey (WPC), a conservatively managed owner of triple-net-leased properties, is yielding 5.7%.  Over the next five or six years, with reinvested dividends, I figure WPC will double your wealth — even if the yield remains exactly where it is today.

For a diversified grab at the whole sector, buy Vanguard REIT ETF (VNQ).  The yield is lower, at 4.3%, but a broad sector fund lets you participate in the growth of up-and-coming businesses that Wall Street may be largely ignoring, or severely underestimating.  Think of Apple (AAPL) in 2003!

Tax tip:  The bulk of a REIT’s dividend typically consists of “ordinary” income, taxable at the same rate as bond interest.  For this reason, it’s generally a good idea to tuck REITs into your tax-sheltered IRA or other retirement plan.

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