For Retirees, This Sector Isn’t All It’s Cracked Up to Be

Retirees and investors close to retirement often favor low beta, high dividend sectors when it comes to equity allocations. Real estate usually checks this boxes, with the added advantage of supposedly lower correlations to the broader equity market.

Source: For Retirees, This Sector Isn’t All It’s Cracked Up to Be

However, with 10-year Treasury yields rising, among other factors, retirement investors may want to reconsider real estate exposure.

Though real estate investment trusts (REITs) scuffled earlier this year, the asset class offers compelling long-term returns, above-average yields, and reduced correlations to traditional asset classes. However, there’s more to that story.

“REITs also look less attractive from a yield perspective than in the past. Because they’re required to distribute nearly all their income to shareholders, REITs can offer above-market dividend yields,” writes Morningstar analyst Amy Arnott. “At the individual equity level, U.S.-based stocks in the real estate sector paid out an average yield of 7.26% over the trailing 12-month period ended December 2019. Yields spiked in early 2020 as investors sold off REITs but have come down considerably since then. The average REIT stock had a monthly dividend-yield payout of about 5% as of February 2021, down from as high as 11% in early 2020.”

Other Real Estate Issues to Consider

Right now, real estate is undergoing a bit of a shift due to the Covid-19 pandemic. With more companies settling into the work-from-home dynamic, less office real estate space is needed and more homeowners are increasing their home office space.

See also: Negative Interest Rates? Not a Problem with ‘NUSI’

Fixed income investors know that yield is hard to come across these days—unless investors are willing to take on more risk by accepting more duration in safe haven government debt, opting for high yield, or looking at opportunities overseas, to name a few. The real estate sector is lagging behind the broader market.

“Current yields are also on the low end relative to long-term averages, and yields for funds are even lower. The average real estate fund has paid out 2.6% over the past 12 months. That compares favorably with current yields for the S&P 500 and the 10-year Treasury bond, which were both about 1.5% as of March 4, 2021, but it’s not a huge advantage. Lower fund yields partly reflect the drag of underlying expenses, which average about 0.8% for real estate mutual funds and exchange-traded funds,” adds Arnott.

For more on income strategies, visit our Retirement Income Channel.