Panic! Panic! Panic!

music selection:  “Cradle To The Grave” — Five Finger Death Punch

I am getting a lot of panicky emails from readers as the market goes through a normal 10% or so correction.  Really, you should be prepared for a 10% decline every 6-9 months or so.  I have some generalized advice for those of you who are emotionally disturbed by the downturn.  It is a sure bet you don’t have enough allocated to income and have too much allocated to equity.  I see lots of investors who think they are “buy and hold” types that are realistically “buy and fold” investors.  They think they have an iron stomach when the times are good and find out reality is a bitter pill when the markets are in decline.  Income investing insulates you from market gyrations as you know you will have money to spend without having to sell into a market decline.

Today, I want to talk about one of my favorite income centric investments, Real Estate Investment Trusts (REITs).  These are companies in the real estate sector that have taken a tax election that allows them to exempt themselves from federal income tax in exchange for making large distributions of operating cash flow to shareholders.  Some are in the real estate leasing business both residential or commercial and some are invested entirely in mortgage securities (mREITs).  Both pay steady streams of income to investors, especially the ones who are patient.  I personally manage my portfolio in early retirement so that 122% of my annual budgetary requirement is met by passive income from dividends, distributions, and interest.  I shrug off market volatility because I know that while my net worth might decline, my spending is safe.

The simplest and most conservative way to invest in the sector is to index yourself with Vanguard’s product “Vanguard Real Estate ETF” (VNQ).  This is an attractively priced security with a weighted average P/E of 7.00.  In addition to being cheap, it currently yields 4.29%.  You can expect a long runway of price appreciation and distribution growth with this ETF to go along with best in class diversification within the sector.

Investors looking for a higher yielding mREIT might consider Two Harbors Investment Corp. (TWO).  The company is primarily invested in mortgage backed securities and operates quite a lot like a bank with remarkably low overhead.  It also has a sideline mortgage servicing business which is quite attractive to me as it shows management is committed to growing revenue from non-traditional sources for a REIT.  The P/E is 3.96 (astounding!) and the distribution yield is currently 9.70%.  Raptor readers know I like to juice returns from distribution yielding stock by writing covered calls and TWO has a relatively liquid options market to allow you take advantage.

Aggressive lizards can invest in a double leveraged mREIT ETN with UBS ETRACS Mthly Py 2xLvg Mortg REIT ETN (MORL).  The ETN tracks an index of REITs that derive at least 50% of their revenue from mortgage related activities.  It is double leveraged and rebalances monthly.  The most attractive part of this security is its yield which currently sits at 21.15%.