For the past several years, the potential of higher interest rate announcements from the Fed has led to share price drops in the real estate investment trust (REIT) sector. The belief is that since REITs are owned for the dividend yield, higher future interest rates are a negative for the sector. The theory is that investors will sell REIT shares to buy fixed income investments when yields on those investments move up. The good news for income stock investors is that the theory is invalid. The fear of higher rates can cause REIT values to drop, but that decline will likely be short-lived, and offers a buying opportunity for future gains.
What the investing public initially fails to understand is that REITs are businesses, with prospects for expansion and financial growth. Higher interest rates from the Fed are primarily a reaction to stronger economic conditions. In a strengthening economy, many REITs will be able to raise rents, make attractive acquisitions and most importantly, grow dividends. About two-thirds of all REITs are currently growing dividends paid to shareholders. In a stronger economy, those not growing dividends may be able to start increasing their payouts and those already growing dividends will be able to pass along larger increases.
Here are three to consider before rates are raised again.