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There’s a group of dividend payers out there whose businesses are doing better than they were before the COVID-19 mess, but their stocks are still ridiculously cheap today, suggests Michael Foster, editor of Contrarian Outlook.

Best of all, we contrarian income seekers can get these stocks at an even deeper discount than regular folks can — while collecting a healthy 6.6% dividend. The trick? Buy them through a closed-end fund (CEF).

The investments we’re going to buy through this CEF are real estate investment trusts, which own and rent out various types of properties, from shopping malls to warehouses and cellphone towers.

The beauty of REITs from a dividend perspective is that they’re essentially “pass-through” entities, collecting rents (which are rising fast these days) from their tenants and handing them over to us as dividends. In fact, REITs have a powerful incentive to do so: they pay no corporate tax as long as they hand out 90% of their earnings as dividends.

Data from NAREIT, the National Association of Real Estate Investment Trusts, makes a pretty convincing evidence that REITs are once again on a roll — something I like to call the “silent real estate boom.” Almost all types of REITs are reporting higher funds from operations (FFO, the main REIT cash-flow metric) than they were pre-pandemic.

If you’re a follower of REITs, you know that they took a particularly hard hit during the pandemic, especially office REITs, as it appeared that the shift to working from home would make their business models obsolete. Except that’s not how things actually turned out.

But the market is overlooking this, and that’s where our buying opportunity comes in. People still need real estate, no matter where interest rates are, and inflation is causing rents to go up, benefiting REITs even further.

As CEF investors, we can get top REITs for even cheaper than the market price when we buy through a fund the Cohen & Steers Quality Realty Fund (RQI). Note the word “quality” in the name — and that’s not marketing.

RQI’s portfolio focuses specifically on REITs that have seen rising free cash flow, like American Tower (AMT), Prologis (PLD), and Public Storage (PSA). These are all companies that have delivered strong total returns for years, and through all market weather. Take a look at the performance of its top-five holdings in the last five years.

That portfolio of cash-boosting real estate companies is why RQI has clocked in an 11.4% average annualized total return over the last decade, more than double that of the broader REIT market.

Does this outperforming, high-quality, high-income-producing fund trade at the premium it deserves? Hardly. Thanks to market fears, it’s dipped to a 3.3% discount, giving us some nice “bonus” savings on top of the deals we’re getting in the already-cheap REIT market.

About the Author

Michael Foster, PhD, has worked as an equity analyst for a decade, focusing on fundamental analysis of businesses and portfolio allocation strategies. Dr. Foster reports are widely read by analysts and portfolio managers at some of the largest hedge funds and investment banks in the world, with trillions of dollars in assets under management.

He received his PhD in 2008 and continues to offer consulting services to institutional investors and ultra-high-net-worth individuals.

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