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@trashiest-bag

At like 2 am

Jun 3rd

2020

Image Source: Realty Income (used with permission)

Realty Income reported solid operating results for the second quarter of 2016, boosted its annual acquisition guidance, and increased its monthly payout yet again. View Valuentum’s 16-page and dividend report on the REIT’s stock landing page here.  

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By Kris Rosemann

Dividend Growth Newsletter portfolio holding Realty Income (O), or ‘The Monthly Dividend Company,’ increased its monthly payout for the 75th consecutive quarter in June 2016 during yet another solid quarterof operating performance. The cumulative monthly payouts in the June quarter of 2016 reflect 4.9% growth over the cumulative payouts in the comparable period of 2015.

Backing such an impressive dividend track record has been Realty Income’s steady portfolio of long-term lease agreements. Occupancy rates in its portfolio continue to hover around 98%--the metric ended the quarter at exactly 98%--helping revenue advance nearly 7% in the second quarter of 2016 from the year-ago period, thanks in part to same-store rents increasing 1.4%. Adjusted funds from operations (AFFO) per share grew 4.4% in the second quarter of 2016 on a year-over-year basis to $0.71.

Realty Income’s per share growth rates were impacted by equity issuances in the quarter that will be used to fund acquisitions throughout the remainder of the year. The company is taking advantage of the current low cost-of-capital environment and has already completed the equity issuances that will fund the majority of its property acquisition activity this year. Thanks to a first half in which management completed $663 million in acquisitions at record-high investment spreads relative to its weighted average cost of capital, the firm increased its annual acquisition guidance for the second time in as many quarters in 2016 to $1.25 billion from previous guidance of $900 million.

In addition to its solid operating performance, Realty Income received some welcome news from the credit rating agencies in the second quarter of 2016. Moody’s (MCO) cited the firm’s “strong balance sheet and liquidity profile, supported by consistently stable cash flows…” as factors behind its decision to raise Realty Income’s outlook to ‘positive’ from ‘stable.’ Standard & Poor’s (SPGI) issued a similar upgrade, and Realty Income’s credit rating remains investment grade.

With a steady, recession- and competition-resistant portfolio of long-term lease agreements and a management team that is able to continually return capital to shareholders via a growing stream of monthly dividends, how could one not love Realty Income? Additionally, we like what we’re seeing from management, as it takes advantage of historically-low costs of capital and a solid pipeline of potential acquisitions, which should only put it in better position when interest rates inevitably begin to rise. Realty Income has been a wonderful performer in the Dividend Growth Newsletter portfolio for members, and we expect to continue to hold it for the foreseeable future.

Want to read more about Realty Income, see Valuentum’s stock landing page here.

Related tickers: VNQ

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Valuentum (val∙u∙n∙tum) [val-yoo-en-tuh-m] Securities Inc. is an independent investment research provider, offering premium equity reports and dividend reports, as well as commentary across all sectors/companies, a Best Ideas Newsletter (spanning market caps, asset classes), a Dividend Growth Newsletter, business/investing book reviews pre-public release, modeling tools/products, and more. Independence and integrity remain our core, and we strive to be a champion of the investor. Valuentum is based in the Chicagoland area.

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Newsletter portfolio holdings Cisco and Realty Income both reported solid results. The 24% jump in Cisco's dividend was welcome news for income investors.

By Kris Rosemann

Two resilient dividend payers that reside in the newsletter portfolios, Cisco (CSCO) and Realty Income (O), reported quarterly results February 10. We were mighty pleased.

Networking giant Cisco, a ~1.5% weighting in both the Best Ideas Newsletter portfolio and Dividend Growth Newsletter portfolio, is a free-cash-flow generating machine. Concurrent with its fiscal second-quarter release, the company announced a remarkable 24% increase in its quarterly dividend to $0.26 per share (good now for a 4.5% forward yield), a pace of growth roughly on par with its impressive ~27% increase in its free cash flow through the first six months of fiscal year 2016. Cisco also added $15 billion to its buyback program, and management remains committed to returning more than 50% of free cash flow to shareholders. Free cash flow came in at $6.1 billion through the first half of the fiscal year, a free cash flow margin of ~25%.

Though Cisco reported modest top-line growth of 2% in its second quarter of fiscal 2016, excluding the impact of its SP Video CPE Business--which was divested--strong execution drove non-GAAP earnings per share up 8% on a year-over-year basis to $0.57, beating the consensus mark of $0.54 per share (GAAP earnings leapt 35% on a year-over-year basis in the quarter). The firm is making positive progress in its shift to a more software-focused business model that will continue to be made up of an increasing percentage of recurring revenue, a transition that should position it well in the current challenging macro environment.

Productivity initiatives helped margins for Cisco as well, and management expects this kind of strong execution to continue as it works to integrate a number of acquisitions it closed in the quarter--four companies in the security, data analytics, and video markets (moves consistent with its strategy to enhance innovation and R&D investment in growth areas). Cisco also announced the acquisition of Jasper Technologies, a provider of a cloud-based Internet of Things software-as-a-service platform, in the quarter; the Jasper deal is expected to close in the third quarter of fiscal 2016. We like the deal-making, and it is not stretching the balance sheet at all.

For starters, cash and cash equivalents stood at $60.4 billion at the end of the fiscal second quarter, while short- and long-term debt tallied ~$24.6 billion—resulting in a net cash position of $35+ billion. For comparison, Cisco’s newly-annualized dividend payment of $1.04 per share translates into cash dividend obligations of ~$5.3 billion per year based on the current tally of shares outstanding, which itself will decline in coming periods as Cisco scoops up its own undervalued equity via buybacks. Importantly, not only does Cisco have enough net cash to cover its annual dividend 6 times over, but it is on pace to generate more than $12 billion in free cash flow in fiscal 2016 alone.

This is why Cisco registers one of the strongest Dividend Cushion ratios, “White Paper: The Dividend Cushion Beats the Aristocrats.” We haven’t liked its equity performance as of late, but the company remains one of the strongest dividend-paying, undervalued ideas on the market today. We may look to add to its position in both newsletter portfolios. We expect to update our 16-page valuation and dividend reports on Cisco soon. Please visit www.valuentum.com for this update.

Realty Income, a 2% weighting in the Dividend Growth Newsletter portfolio, is another fundamentally-strong dividend payer that used a strong quarter to announce a solid dividend increase. After the “The Monthly Dividend Company” pays its February dividend February 16, it will have grown its annualized payout 5% from that of the same time a year ago ($2.382 in February 2016 from $2.268 in February 2015). The REIT’s portfolio of commercial real estate, which is owned mostly under 10 to 20-year leases, provides dependable rental revenue that supports the payment of its seemingly ever-growing monthly dividends; the fourth quarter of 2015 represented the 73rd consecutive quarter of a dividend increase, for example.

Realty Income had its third most active year in terms of acquisition spending, as it invested $1.26 billion in 286 different properties. In addition to the growth via acquisitions, same-store rents on 3,636 properties under lease advanced 1.3% from 2014. Favorable pricing and terms on capital raising activities and a healthy portfolio occupancy of 98.4% also helped drive a solid increase of 6.6% increase in adjusted funds from operations (AFFO) per share in 2015 from the year-ago period to $2.74. Looking ahead to 2016, the firm is guiding AFFO per share to be in a range of $2.85-$2.90, good for growth of 4%-5.8% from 2015, which will continue to supply ample room for growth in the monthly payout.

We’ve long been fans of Realty Income, though we note shares have rocketed past our $55 fair value estimate, “16-page Valuation Report.” We’ll be monitoring them closely.

Like this commentary? Consider subscribing to Valuentum here to receive more.

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We all have bills to pay. And whether it’s your mortgage, your utilities or just that pesky credit card bill, life’s little expenses tend to recur every month. There’s just one problem with this: If you’re living off of your investments, you normally get paid on a very different timeframe. Dividends are usually paid quarterly, and bond interest is usually paid semi-annually. 

I don’t know about you, but I don’t like trying to plan my expenses three to six months in advance. And for a retiree, I can’t think of too many things scarier than running out of money in between quarterly dividend payments. 

Well, fear not. I have a solution: Monthly dividend stocks. 

Many closed-end bond funds have traditionally paid their dividends monthly, which is nice. It shows that the managers understand their investors and try to accommodate them. But among everyday dividend stocks, it’s still surprisingly rare and usually limited to a REITs and business development companies. Today, we’re going to look at five solid monthly dividend stocks that can be used to round out an income portfolio.

STAG Industrial (STAG)

I’ll start with a young REIT that I’ve owned for years, STAG Industrial  (STAG). STAG is a small-cap REIT with a market cap of about $1.3 billion. That makes it large enough to be diversified but still small enough to fly under the radar of most investors. 

STAG switched from a quarterly dividend to a monthly dividend in late 2013. STAG’s business model is simple enough to understand. The REIT invests in single-tenant industrial real estate — things like warehouses and light manufacturing facilities — that tend to require little in the way of maintenance and ongoing expenses. As of the most recent investor presentation, STAG had a portfolio of 253 properties spread across 36 states and 231 tenants, most of which are investment-grade rated. 

More than 60% of STAG’s tenants have revenues of more than $1 billion per year, and the 10 largest tenants collectively only account for 15.5% of STAG’s annualized base rent. That’s a conservative profile, which is exactly what you want from one of your monthly dividend stocks. 

After the broad selloff in REITs this year, STAG’s monthly dividend yields a healthy 7.2%. And importantly, STAG has been a steady dividend raiser. STAG raised its dividend 4.5% this year after raising it 10% last year. That’s well ahead of the rate of inflation — something that every retiree should keep in mind.

EPR Properties (EPR)

Up next is a quirky REIT that I’ve highlighted in the past, EPR Properties (EPR). EPR operates in an interesting niche of the real estate market, focusing mostly on entertainment. (“EPR” is short for “Entertainment Properties.”) 

With its collection of non-traditional assets, including movie theaters, golf driving ranges and even charter schools, EPR is hard to classify. Most REITs get lumped into a broad sector, such as residential, commercial or office. There isn’t exactly a category for movie, golf and school REITs. 

That’s OK. I don’t need for EPR to fit into a neat category box. I just need it to keep paying its monthly dividends! In fact, EPR’s quirky asset mix works to our benefit, as it a lot of institutional investors frankly don’t know what to do with it. The lack of institutional buying helps to keep the price low and the yield high. 

Today, EPR yields a fat 6.8%, and the REIT has been a steady dividend raiser for years. Over the past five years, EPR has grown its dividend at a 6% clip. Not too shabby. As with STAG, EPR switched its dividend payment from quarterly to monthly in 2013.

Realty Income (O)

Of course, we can’t have a list of monthly dividend stocks and not mention the “Monthly Dividend Company” itself, Realty Income (O). 

In my view, Realty Income is about as close to a bond as you can get in the stock market in terms of reliability. It pays its dividend like clockwork every month, and its cash flows are supported by a rock-solid portfolio of high-traffic retail properties. 

This stock has made 542 consecutive dividend payments, and I see nothing short of nuclear war or the actual end of days breaking that chain. But while I consider Realty Income as safe as a bond, its returns are vastly superior. Since its 1994 listing, Realty Income has enjoyed compounded total returns of 16.4% per year. And it has also raised its dividend for 72 consecutive quarters. 

I have shares of Realty Income that I keep in my IRA that I have pledged never to sell. My dividends are set to automatically reinvest, and I never look at the account. (Well, I shouldn’t say “never.” Once a year I login just to make sure nothing is wrong.) I intend to leave these shares to my kids someday, and if they’re smart they’ll do the same for their own children. I expect Realty Income to still be around by then, and still kicking off a fantastic monthly dividend.

LTC Properties (LTC)

I’ll add one more REIT to our list of monthly dividend stocks: LTC Properties Inc  (LTC). To get an idea of what LTC does, just look at its ticker symbol: “LTC” stands for “long-term care,” making LTC an interesting way to play the aging of the Baby Boomers. More than 8,000 baby boomers turn 65 years old with every passing day, making this a durable trend with staying power. LTC is a stock you can buy and forget while enjoying a steady stream of monthly dividends. 

LTC Properties has a specialized portfolio of properties targeting skilled nursing, assisted living, independent living and memory care. About 20% of its portfolio is also invested in mortgages backed by these kinds of properties. 

LTC currently yields 4.9%. That’s lower than some of our other monthly payers, though still pretty competitive for a medical REIT. And like our other monthly-pay REITs, LTC has a long history of raising its dividend. LTC recently announced a 5.9% dividend hike, and the REIT has managed an 8.6% dividend growth rate over the past five years. 

Also worth noting: Unlike most of the REIT sector, LTC’s stock price is actually in positive territory for the year.

Prospect Capital (PSEC)

That’s enough about REITs. Let’s take this list of monthly dividend stocks a different direction, starting with business development company Prospect Capital (PSEC).

As with closed-end funds, business development companies (BDCs) tend to be held by individual investors rather than institutional investors. This goes a long way to explaining why many are monthly dividend stocks. They’re simply giving their investors what they want. 

Prospect Capital yields 13% at current prices and trades at a deep discount to book value, something that has only happened a handful of times in the company’s history. Use this as an opportunity. While you’re waiting for the stock to return to a more normal valuation, you get to collect a high monthly dividend.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog.

I’m not wildly enthusiastic about the prospects for the broader stock market over the remainder of 2015. But I do think that REITs offer a pocket of value. I don’t see bond yields rising much in today’s market. If the Fed is too timid to raise rates, that tells you that there are enough macro risks out there to keep bond yields low. But if and when the Fed finally does get motivated to raise rates, I don’t see that translating to higher long-term bond yields, or at least not for a while. A higher Fed funds rate is disinflationary, which is good for bond prices.

So for the time being, we seem to be in a sweet spot for bonds where, irrespective of what the Fed does, bond yields should stay lower-than-normal for a while. And as long as bond yields stay low, REITs should outperform the broader market.

Source: Nasdaq

But there is one more reason to believe that REITs are due to continue their rally. Several of the names I follow are very heavily shorted right now. Short sellers have been punishing the sector for months in the view that higher interest rates would wreck the sector. But here’s the thing about heavily-shorted stocks. When you short a stock, you are obligated to buy it back. So when you see a heavily-shorted stock, you know that there is a lot of buying that must happen… eventually. And if too many short sellers try to close their positions at the same time, you get a short squeeze that can send the stock price sharply higher. To toss out a few examples from the list above, Realty Income has a short interest currently equal to more than 11 days’ worth of daily volume. VEREIT has a short ratio of 9 days to cover. And Digital Realty has an almost ridiculously high short ratio of 20 days to cover.

Short sellers have had a great six months shorting the REIT sector. It’s been a profitable trade for them. But with REITs showing modest strength right now in the face of broad market weakness, I expect those short sellers to start bailing… and soon.

Even though they generally have a low correlation to the broader market, REITs are still stocks. And if we have another volatile rough patch like August, you can expect them to fall alongside the rest of the market, at least temporarily. But I still expect REITs to massively outperform the broader market for the remainder of 2015, particularly if the shorts get squeezed.

It’s not how much you make that ultimately matters in wealth accumulation but how much you keep, and the amount of your gains that get lost to taxes are a major factor in your realized returns. 

Thankfully, you don’t have to be a millionaire with an army of lawyers to effective game the tax code. Even the basic tools available to every American taxpayer, such as IRAs and Roth IRAs, can be wildly effective in lowering your tax burden and compounding your wealth at a much faster rate. 

But as wonderful as an IRA or Roth IRA can be as a tax-free accumulation vehicle, we’re limited to contributions of just $5,500 per person per year ($6,500 if you are aged 50 or older). And worse, your ability to contribute to a Roth IRA gets phased out at higher income levels. So, if you’re aggressively saving for retirement, you’re going to have a large portion of your savings invested outside of an IRA or Roth IRA and subject to ravages of taxation. 

This means we have to pick and choose which investments we put in our IRA or Roth IRA. And choosing poorly here can make a big difference to the lifestyle you can afford in retirement.

What Not to Buy in an IRA

Let’s start with what you shouldn’t put in an IRA or Roth IRA. Most obviously, this would include tax-free securities like municipal bonds. Any investor stupid enough to waste precious IRA funds on tax-free muni bonds should be taken out back and shot. Or at least sterilized. 

The same is true of MLPs and other “special” stocks that create tax complications. Because MLPs can generate unrelated business taxable income (“UBTI”), they can create bizarre tax situations in which your IRA has to file its own tax return and pay taxes. And looking at the bigger picture, given that most MLP distributions are indefinitely tax deferred, there is no benefit to placing them in an IRA or Roth IRA. You're effectively wasting precious IRA dollars. 

Casting the net a little wider, I would say the same about tax-efficient index mutual funds or ETFs you intend to hold for the long-term. There’s just no point in putting them in an IRA. Portfolio turnover is minimal in index funds, so they generate very little in taxable income other than the dividend yield, which these days amounts to all of 2%. Plus, once you sell the funds to pay for your retirement expenses, you’re going to be paying ordinary income tax rates on the full amount of the funds withdrawn from an IRA, whereas you’d be paying the long-term capital gains tax rate on just your capital gains on a taxable mutual fund or ETF investment. (You wouldn’t pay taxes on monies withdrawn from a Roth IRA, but my point stands.) 

Now that we’ve gotten that out of the way, we can talk about what makes a solid IRA investment. Ideally, you should prioritize for your IRA or Roth IRA any investment that gets a large chunk of its total return from current income. And specifically, it should be current income that does not benefit from special tax rates, such as qualified dividends taxed at the preferential 15% and 20% rates.

So with no more ado, let’s jump into the five best IRA investments.

Business Development Companies

Business development companies ("BDCs") are an interesting niche of the market. They essentially do what banks used to do back in the good ol’ days before the 2008 crisis: Lend money to up-and-coming businesses. 

The tax code gives a nice bonus to BDCs. In order to encourage them to provide funds to capital-starved young businesses, all profit is tax free at the corporate level…so long as they distribute at least 90% of it as dividends. 

As BDCs are unable to retain much of their earnings for future growth, a large chunk of the total returns to investors comes from the dividend. Many BDCs yield well in excess of 10%. 

That alone would make them an ideal IRA investment. But that’s not where the story ends. The taxability of BDC dividends will vary from company to company, but the dividend will generally be some combination of lower-taxed “qualified” dividends, higher-taxed unqualified dividends and tax-deferred return of capital. Typically, the biggest chunk of the dividend is considered non-qualified and taxed as ordinary income, making BDCs woefully tax inefficient. This makes them particularly well suited for an IRA or Roth Ira. 

I’m a fan of BDCs under the right conditions, and I made a BDC my pick in this year’s Best Stocks contest. Prospect Capital (PSEC) trades at a deep discount to book value and pays a fantastic 14% dividend yield.  Thus far, the stock has had a rough 2015, though I expect it to finish the year strongly. I also consider it an outstanding IRA investment…and happen to own it in my own IRA.

Equity Real Estate Investment Trusts

Along the same lines we have equity REITs. Equity REITs have one of the simplest business models out there. They buy or develop real estate, lease it out, and collect the rent. As with BDCs, REITs pay no taxes at the entity level…so long as they pay out 90% of their net income in the form of dividends. 

Though REITs are considered to be long-term growth vehicles, they also get a high percentage of their total return as income. But as far as tax treatment goes, REITs tend to get punished even harder than BDCs. In any given year, some portion of a REITs dividend may be classified as capital gains distribution or as a tax-free return of capital. But the lion’s share of the payout will generally be a non-qualified dividend taxed as ordinary income. 

One REIT I hold in my IRA that I am unlikely ever to sell is “the monthly dividend company” Realty Income (O). Realty Income has paid 540 consecutive monthly dividends and has increased its dividend for 71 consecutive quarters. At current prices, it yields about 5%.

Mortgage Real Estate Investment Trusts

Even less tax efficient than equity REITs would be their cousins, mortgage REITs. 

Like equity REITs mortgage REITs avoid taxation at the company level so long as they distribute 90% of their profits as dividends. But mortgage REITs are even more dependent on their dividends for their total returns than equity REITs, as there is virtually no long-term growth component. 

Equity REITs hold properties that are presumed to rise in value over time. Mortgage REITs hold mortgages…which are eventually paid off or refinanced. Many mortgage REITs, including blue chips like Annaly Capital (NLY), pay dividends well in excess of 10%. And virtually all of it is going to be taxed as regular income. This makes a mortgage REIT a very obvious choice as an IRA investment. 

Mortgage REITs have been slammed in 2015 by fears that a Fed rate hike would raise borrowing costs and crimp profitability, and today many mortgage REITs trade for just 80%-90% of book value. At these prices, they would seem to be a low-risk bargain.

Bonds

Personally, I think you would have to be crazy to own bonds at today’s yields. I am about as close to a “bond bull” as you are likely to find these days because I believe that long-term yields will stay low for a long time to come. But that is hardly a rousing endorsement. 

At current yields, you’re locking in returns of, at best, 2.2% in 10-year Treasuries, and high-quality corporate bonds don’t yield much better. In my view, you’re much better off trying your luck with high-quality dividend-paying stocks. 

Nevertheless, some investors crave the safety and predictability of bonds. And if you are going to invest in bonds, then by all means, you should protect your modest income stream by placing them in an IRA. Bond interest is taxed as ordinary income, and bonds get virtually all of their returns in the form of current income if held to maturity. This makes them an extraordinarily tax inefficient investment…and a perfect IRA investment.

Precious Metals 

And finally, we get to precious metals. I don't consider previous metals an "investment," per se. In my view, you keep a few gold coins around for the same reason you keep a gun: As "insurance" in the event that things really got bad. (Yes, my true Texas colors are starting to come out.) 

So, I personally would never keep a position in gold or any other precious metal in an IRA. In the event I actually needed gold, I would want it physically in hand. But I also realize that my views a little eccentric here. Plenty of investors consider precious metals a viable asset class and allocate a portion of their portfolio to it in the form of a metal-backed ETF such as the SPDR Gold Trust (GLD) or the iShares Silver Trust (SLV). 

If you are one of those investors, keep your precious metals investment in an IRA. Metals are considered “collectibles” for tax purposes, and gains are taxed at a 28% tax rate rather than the usual 20% capital gains rate.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. 

This year has proven to be a rough one for dividend stocks. With the Fed’s rate hike looming and with bond yields rocketing higher, traditionally high-yielding sectors like REITs and utilities have taken an absolute pounding. The REIT sector, as represented by the Vanguard REIT ETF (VNQ), is down more than 13% from its January highs and is well into negative territory for the year. Many REITs are down more than 20%, putting them into outright bear market territory. 

Utilities have actually fared a little worse. The Utilities Select SPDR ETF (XLU) is down close to 14% from its January highs. And as with REITs, many individual utility stocks are down significantly more. 

After a good correction, it’s always worthwhile to look for bargains. So today, we’re going to pit REITs against utilities to see which is the better dividend play for the remainder of 2015. We’ll judge the winner of this smackdown on three criteria: Current dividend yield, dividend growth, and overall macro backdrop.

Dividend Yield

It can get a little messy when comparing yields across sectors because most investors do not simply buy the index. They cherry pick the individual stocks they like best, which can have yields that are markedly different from the average for the sector. So, we’ll look at both the index averages and at some individual names that investors are likely to own. 

At current prices, VNQ yields 3.8%, beating out XLU’s 3.5%. But it’s only fair to note that both sectors out-yield Treasuries by a decent margin. As of this writing, the 10-year Treasury yielded a pitiful 3.3%. 

Let’s take a look at the portfolios of each. VNQ’s largest holding by a wide margin is Simon Properties Group (SPG), which makes up more than 8% of the portfolio. Public Storage (PSA) and Equity Residential (EQR) round out the top three at 4.1% and 3.8% of the portfolio, respectively. None of these three are particularly high yielders, with current dividend yields of 3.4%, 3.6% and 3.1%, respectively. 

In my view, Realty Income (O), LTC Properties (LTC) and Ventas (VTR) are better options as buy-and-hold dividend stocks. At current prices, they yield 5.0%, 4.9% and 4.9% respectively, and all have long track records of raising their dividends. 

Now let’s dig into XLU’s holdings. Duke Energy (DUK), NextEra Energy (NEE) and Dominion Resources (D) dominate the portfolio. Of these, Duke is the highest yielder with a 4.4% dividend. NextEra and Dominion yield a less impressive but still competitive 3.1% and 3.9%, respectively. But for a higher yield, you might consider Southern Company (SO), with its 5.1% yield, or Gas Natural (EGAS), with its 5.4% yield.

Dividend Yield: Advantage REITs

Dividend Growth

Comparing dividend growth between ETFs can also be a little messy. You have to remember what an ETF is: It’s a collection of companies, each with its own dividend payment schedule. To smooth this out, I took an average of the dividends paid over the trailing four quarters and compared to the average from the prior year. And here’s what I found. 

Dividend growth in the utilities sector has been pretty modest. Over the trailing four quarters, XLU’s payout grew by 3.5%.  And going back to 2011, year-over-year growth has ranged from a little less than 0% to a little less than 8%. That’s more than enough to keep pace with inflation, but not enough to really excite me. 

Now, let’s look at REITs. VNQ’s dividend rose by nearly 10% over the trailing four quarters, and going back to 2011 its average growth has been about 11%.  

Utilities have seen decent enough dividend growth, and a utility stock is still a better option than a bond in my view. But REITs have clearly beaten the pants off of utilities in terms of dividend growth, and I expect that to continue going forward.

Dividend Growth: Advantage REITs

Macro Conditions

This brings me to the final criterion, the overall macro environment. With the deregulation of recent decades, utilities are not quite as hamstrung as they used to be and often have more flexibility to pass on rising energy costs to consumers. But this remains a regulated industry, and that ability is by no means absolute. Utilities, uniquely among industrial sectors, are still subject to political whims. 

And making it worse is the growing popularity of self sufficiency via solar energy. The falling cost of solar panels is an absolute disaster for the utilities industry. Not only does it remove would-be paying customers, but it also forces the utilities to buy relatively expensive excess productions from households with solar panels, all while guaranteeing capacity during peak hours or during periodic shortages of solar energy. All in all, utilities are operating in a difficult environment that only promises to get more difficult. 

REITs have none of these issues, and the macro environment actually looks good for REITs. Rising bond yields raise borrowing costs, but a growing economy should translate to higher property prices and higher rents. 

Macro Conditions: Advantage REITs

In this dividend stock smackdown, REITs are the hand-down winner. They beat utilities in terms of both current yield and dividend growth, and they face none of the complicated macro issues that utilities face.

This piece first appeared on Sizemore Insights.

Charles Lewis Sizemore, CFA, is chief investment officer of the investment firm Sizemore Capital Management and the author of the Sizemore Insights blog. As of this writing, he was long VNQ, O, LTC, VTR.