They call it the “silent wealth killer” for a reason: it takes the 2.2% yield you’d get from say, a 10-year Treasury note today and almost completely wipes it out.
And if this hidden threat perks up even a little bit (as it’s certain to do), it will push your average Joe (or Jane) into negative yields, no matter if they’re playing it “safe” in Treasuries or CDs or holding tight to the big names of the S&P 500.
I’m talking about inflation—and I’ll name 3 terrific investments that safeguard your income when it flares up in just a moment.
Before I do, let me just say that I know that inflation hasn’t been on anyone’s radar for years. But before you roll your eyes, consider this: even though personal consumption expenditures—one of the Fed’s main inflation gauges—were just 1.7% in April, the SPDR S&P 500 ETF (NYSEARCA:SPY) yields just 1.9% as I write.
It doesn’t take a math whiz to see that this leaves us with just 0.2% “real” income on the S&P 500 and 0.5% on the 10-Year—so we’re not retiring on either one!
A Slow Burn
Inflation is an even bigger worry if you’re retired or near retirement. That’s because, as my colleague Michael Foster pointed out in a June 6 article, the cost of health care rises far faster than what you’ll pay for many other things.
According to May 2016 numbers from HealthView Services, a healthy 65-year-old couple retiring this year can expect to spend $377,412 in today’s dollars on health care throughout their golden years.
That’s shocking, but it gets worse.
Because the average annual inflation rate for retiree healthcare costs is expected to clock in at 5.1% over the next 20 years, easily doubling up today’s inflation rate and the yields on both the “sacred cows” of the S&P 500 and the 10-Year.
The bottom line: If you want to keep your income safe, you need to prepare now.
Don’t Just Weather Inflation—Attack It
We’re going to do just that by zeroing in on stocks that raise their payouts faster than inflation and the market as a whole—preferably a lot faster.
That’s where the three names I have for you today come in. All three have solid dividend-growth histories and the strong cash flows they’ll need to keep those inflation-crushing payout hikes coming.
And here’s something that would make first-level investors go pale: all three are real estate investment trusts (REITs), investments most people think get hammered when inflation strikes … but that’s a myth, as I’ll show you in a second.
3 Proven Inflation Killers
When researching REITs for my Contrarian Income Report service, I like to start by looking at the past. And there’s no better place to look than at the last sustained period of soaring inflation, from March 2004 through June 2006, when the consumer price index spiked from 1.7% to 4.6%.
The Fed more than quintupled rates in response—from 1.0% to 5.25%.
Proving the REIT Bears Wrong
Better yet, while yields on these three average around 2.5% today, their outsized payout growth (98.7%, on average, in the last five years!) will have you collecting much more than that in short order:
Payouts Outpace Rising Prices
To put this chart in context, if you bought all three of these stocks five years ago, you’d be enjoying a nice 4.7% payout, on average, on your investment today.
Finally, you’re getting plenty of diversification (plus a nice underlying play on tech-sector growth, as I’ll show you shortly) out of just three stock picks here.
Let’s take a closer look at each, starting with my favorite of the three:
The Backbone of the Wireless Revolution: American Tower Inc
American Tower owns 147,000 towers broadcasting, cellular, wireless, television and radio signals. The stock has been on a tear lately, surging some 22% in the last year.
That’s got AMT trading at 21.6 times adjusted funds from operations. (FFO is a far better measure of REIT performance than earnings, as I explained in my June 7 article, “How to Find Bargain REITs With 7%+ Yields.”)
But don’t let this seemingly high number keep you away, because the trust’s AFFO growth has kept pace, for the most part:
For all of 2017, management forecasts FFO of $6.50, which would put American Tower’s price-to-FFO ratio at 20.5, right back where it was 12 months ago.
You can look forward to far more dividend growth, too: AMT is the lowest yielder of our trio, with just a 1.9% payout, but it’s easily the fastest dividend grower, nearly tripling its payout in the last five years.
There’s more to come, thanks to a shockingly low payout ratio (or the percentage of FFO paid out as dividends): just 35.7%.
An E-Commerce Play for Dividend Fans: Prologis Inc
My No. 2 pick, Prologis is a 3.0% yielder that just boosted its forecast 2017 FFO to between $2.72 and $2.78, well up from its original forecast of $2.60 to $2.70 and the $2.57 in FFO it turned out last year.
That leaves the stock trading around 20.5 times the midpoint of the predicted range—a reasonable level for a fast-growing REIT like Prologis, which is riding the surging online shopping trend thanks to its 379 million square feet of warehouse space in the US.
Finally, this payout is safe, clocking in at just 71% of trailing-twelve-month FFO.
A Turnkey Apartment REIT: Essex Property Trust Inc
Essex Property Trust owns 243 residential buildings that comprise 59,240 units on the West Coast. The stock yields 2.7%.
Rising inflation and interest rates will be bullish for Essex, because they’ll help management raise rents. Plus, the REIT is focused on tech hubs like the San Francisco Bay Area, Los Angeles and Seattle, home to a potent combo: pricey homeownership (which will only get pricier as rates rise) and throngs of millennials, many of whom would rather rent anyway.
FFO has risen at a 9% annualized rate since the REIT’s IPO, driving 23 straight years of dividend hikes for shareholders.
The valuation is starting to look a little squeezed at 22.4 times the midpoint of management’s forecast 2017 FFO ($11.76), which is why Essex is my No. 3 pick. But the trust’s favorable demographics, healthy markets and high occupancy rate (96.5% in the first quarter) will help put an updraft under the stock.
And you’ll get some added downside protection from Essex’s dividend growth: the last big payout hike (a 9.4% increase) came last month, and dividends account for just 59.5% of the midpoint of this year’s FFO forecast, setting up another big hike next May.
Inflation-Proof REITs: 7.4%+ Yields and 20% Upside
The 3 REITs I just showed you are all solid companies, but they don’t hold a candle to my favorite REIT today.
This income wonder pays an 8% yield right now—but that’s actually an 8.4% forward yield when you consider we’re going to see four more dividend increases over the next year.
You read that right: this cash machine hikes its payout every quarter, not every year. Oh, and the stock is cheap, trading for less than 10-times FFO.
But I expect its share price to jump 25% over the next 12 months as more money piles into the REIT sector. That means now is the best time to buy and secure that juicy 8.4% forward yield.
Same goes for another REIT favorite of mine, a 7.4% payer backed by an unstoppable demographic trend that will deliver growing dividends for the next 30 years!
Both of these REITs are best buys in my “8% No-Withdrawal Portfolio,” which I’ve custom built to let retirees live on secure dividend payouts alone. Aside from their gaudy yields and payout growth, you’ll enjoy some nice price upside to boot, thanks to these stocks’ ridiculously low valuations.
There’s never been a better time to buy REITs and live off their dividends. But you need to choose wisely. I’d love to share all of my favorite REIT picks with you—including their names, tickers and buy prices. Click here and I’ll send full details on my 8% No-Withdrawal Portfolio your way now.