With the Fed about to raise interest rates, the dollar’s record climb, and the oil supply glut, high-yield income investors should be extra cautious right now. Navigating these choppy market conditions is paramount, and Tim Plaehn is recommending two high-yield investments that will help you do just that. They’re on sale right now so don’t miss out!
So far, 2015 is not a repeat of 2014 for investors. Last year, the investing public rushed into the different types of income stocks such as master limited partnerships, MLPs, and real estate investment trusts, REITs. The quest for yields greater than the 0% to 2% available in the investment grade fixed income markets helped push share prices higher and higher. The MLP gains party came to a stop (a temporary stop in my opinion) with the drastic declines in the prices of crude oil and natural gas in the second half of the year. REITs kept on chugging upward until just about one month ago. Now REITs are falling, with most of the blame based on fears that market interest rates will soon start increasing. The market is over-reacting to drive down REIT share prices, providing an excellent buying opportunity.
Stock market participants tend to view REITs almost as another form of fixed income investing. A commercial building with a long term lease contract sort of looks like a long term bond with fixed interest payments. This perceived correlation between REITs and bonds causes the market to buy or sell REIT shares in response to expected interest rate changes. The possibility of rising interest rates poses three challenges to REIT share prices.
- First, the mathematical effect of rising rates for bonds is lower prices. The same expectation is often applied to REIT values.
- Second is the belief or expectation that higher interest rates in the bond market will cause investors to sell REIT shares and reinvest that money in “safer†bonds, once bonds are paying comparable yields.
- Third, REITs themselves use significant levels of debt in their capital structures, and higher interest rates could increase interest expenses and reduce the cash available to investors.
