Published June 11, 2013
“Sell in May” would have been bad advice for stock investors in 2013. The S&P 500 tacked on over 2% in the month, even if the last week and a half was a little rough.
But investors in REIT and MLP shares—which until recently were some of the best performing assets—have suffered something of a bloodletting.
The MLP sector, as measured by the JP Morgan Alerian MLP ETN (AMJ) was down 5% from its May 20 close through the end of May, and REITs, as measured by the Vanguard REIT ETF (VNQ), were down more than 8% in that period. Looking at individual securities, the numbers get worse. Realty Income (O), National Retail Properties (NNN), and Retail Opportunities Investment Corp (ROIC)—three REITs I hold in my Dividend Growth were down 17%, 14% and 10% respectively for this period. Martin Midstream (MMLP), a high-yielding MLP I hold in the same portfolio, was down by just under 10%.
June hasn’t brought relief for the REIT and MLP sectors. And utilities, telecoms and other so-called “defensive sector” stocks have also taken heavy losses.
For stocks that were often purchased precisely for their potentially low-volatility and high-income properties, it’s frustrating to see that much value evaporate lately, particularly when the broader market is holding up well. But as investors, it doesn’t do us a lot of good to dwell on our frustrations. We have to look forward and allocate our capital based on the options in front of us.
So, what are our options? Is the bull market in dividend paying stocks over?
I personally don’t believe so. As asset classes, REITs, MLPs and other income-oriented investments have outperformed the market in recent months, and they were probably due for a much-needed correction.
“Boring” sectors cannot lead a broad bull market forever; eventually cyclical, economically-sensitive need to take leadership. And that is what appears to be happening today. Daimler (DDAIF) and Cummins (CMI), two industrial stocks held in some of my more aggressive portfolios, have been performing well, as have my Big Tech dividend payers Intel (INTC), Microsoft (MSFT) and Cisco Systems (CSCO).
For the remainder of 2013, I see these stocks being in a sweet spot for investors. All are dividend paying stocks, yet I believe all should also benefit from a potential rotation from defensive sectors to growth sectors.
And what about REITs and MLPs?
I’m not quite ready to give up on those just yet. I believe the recent selloff was due to fears that the Fed would be unwinding its quantitative easing programs, and that bond yields would soar as a result. But as the experience of Japan has proven, during a prolonged period of deleveraging bond yields can stay much lower for much longer than most investors expect.
Could the 10-year Treasury rise to, say, 2.5%-3.0% over the course of the next 12-18 months? Absolutely. But I would consider that the high-end of a long range that I expect to persist for the remainder of this decade.
In the meantime, both REITs and MLPs stand to benefit from durable trends that I personally believe should continue irrespective of what the Fed does. The American property market continues to heal, and the domestic energy boom continues to provide ample demand for pipeline assets. Under even modest expectations, I believe REITs and MLPs should be able to grow their cash distributions at a rate well in excess of inflation.
For our portfolios for the rest of 2013, I am planning to overweight cyclical dividend payers, particularly those in the tech sector. But I am making sure to save room for REITs and MLPs and are prepared to buy on any continued weakness.
The investments discussed are held in client accounts as of May 31, 2013. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable.
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