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REITs -- What Percentage?
#1
In my continuing effort to consider more diversification, I ask the following:

What percentage of your portfolio are you comfortable allocating to REITs?

Do you consider them higher risk than your main dividend growth stocks?

Which ones let you sleep most soundly at night? I assume I'd stick with the more conservative choices like O and OHI and not dabble in the more esoteric ones like NLY.

Do you think this is a great, terrible, or average time to get in? The sector has taken a beating this year, but that doesn't mean they are cheap or safe at these prices.

Thanks in advance!
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#2
I hold O, OHI and DLR in my 401k account for about a 6% portfolio weighting. Also hold ARCP in another account.

Brad Thomas had a good article talking about historical info on REIT's and the impact of the rising interest rates.

Personally, I don't think it is a bad time to enter. I think most of the interest impact has been priced in and even with the large recent drop, many REIT's are just back to where they were at the end of 2012.

I agree that you should avoid the mREIT's and stick with quality eREIT's.

DLR may be a reach as far as S.W.A.N. goes, but I feel the market has overblown some of the issues regarding the stock and with my long term plan I think compounding dividends at this level will work out well for me.
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#3
For me the optimal weightings are within a range of 10%-20%. Ten percent would represent a typical climate and 20% would represent a time of either steeply discounted valuations or a time when particularly favorable winds are blowing in favor of REITs. I think that much better entry levels are in the not too distant future, so will keep some cash to raise the allocation when the inevitable harsh market reaction comes.

To me there is a big distinction between property REITs and mortgage REITs. Property REIT most always have a place in the portfolio, but MREITs are only suitable when market conditions are very favorable for their origination activity, when spreads are large, and accumulation of portfolio assets is very profitable.
Alex
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#4
My REIT exposure is around 5 percent right now, but some of that is mREIT NLY. I'm planning over time to target 5 to 10 percent for REITs, but with that being mostly made up of the more run of the mill stuff like O, OHI, ARCP, and the such. I'm not sure if I will dump or pare back my NLY, or if I will just let it diminish as the rest of my portfolio grows. For now it is sitting there like serving as a cautionary tale in my portfolio. My crystal ball is cloudy as to whether this is a good time to get in. I feel confident n saying that it is a better time than 6 months or a year ago.

Your post makes me think we could have a valuable thread about target allocations more generally. Here's a rough snapshot of my portfolio at the moment, broken down by sectors that I more or less made up:

   
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#5
I'm currently at 5-6% but will probably go to 10-12%. I'd like to add some O here shortly.
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#6
In the past I tried harder with diversification, but at some point it just gets crazy. I mean, there are market sectors and subsectors, there is value versus growth, there is market cap, diversification by region, and even diversity between various asset classes. The last couple of big market drops, most everything just seemed to drop in tandem, so now I spread the play, keeping a very close finger to the trigger in my more active accounts, but don't have anything other than very loose guidelines for diversity.. Right now my long term account is 100% in equities. Hopefully over time it will be rounded out to include various debt investments.

My biggest concern is how to deal with a 50% drop in markets. That happened to me in 2008/2009 when my portfolio dropped by almost 50%. I stayed long, made some adjustments, and recovered the losses in around a year. But the feeling was most uncomfortable when looking at the huge losses in early 2009. The warm and fuzzy feeling of a dividend stream did little to comfort at that point. Plus, being 100% long, there was no way to take advantage of the heavily discounted bargains that were available. That experience will probably cause me to most always keep some available cash in the future. Lost revenue on the cash will just be a cost of readiness, while wailing for the market's next bout of schizophrenia.
Alex
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#7
The balance of my GTC buy for O filled on this morning's dip. I still think that there is lots of pain to be felt by REITs in the not too distant future, but will be patiently, incrementally adding during that time. REITs are now weighted at just over 5%, still far lower than what I would call normal. That is because, IMO, the climate is lousy. For the best REITs yields are near historical lows, and higher interest rates/borrowing costs are coming in the near future. That is not a good recipe for share price stability or for earnings stability/growth.
Alex
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#8
(12-12-2013, 09:24 AM)hendi_alex Wrote: In the past I tried harder with diversification, but at some point it just gets crazy. I mean, there are market sectors and subsectors, there is value versus growth, there is market cap, diversification by region, and even diversity between various asset classes. The last couple of big market drops, most everything just seemed to drop in tandem, so now I spread the play, keeping a very close finger to the trigger in my more active accounts, but don't have anything other than very loose guidelines for diversity.. Right now my long term account is 100% in equities. Hopefully over time it will be rounded out to include various debt investments.

My biggest concern is how to deal with a 50% drop in markets. That happened to me in 2008/2009 when my portfolio dropped by almost 50%. I stayed long, made some adjustments, and recovered the losses in around a year. But the feeling was most uncomfortable when looking at the huge losses in early 2009. The warm and fuzzy feeling of a dividend stream did little to comfort at that point. Plus, being 100% long, there was no way to take advantage of the heavily discounted bargains that were available. That experience will probably cause me to most always keep some available cash in the future. Lost revenue on the cash will just be a cost of readiness, while wailing for the market's next bout of schizophrenia.

Slightly OT but how much did your dividend stream drop when your portfolio dropped 50%?
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#9
I don't have a clue. But if the portfolio had been 100% invest in DG types of stocks, I'm sure the stream would have not taken too much of a beating outside of financials. I took a hit on both banks and on MREITs and BDC's but exited all well before their worst drops. Problem is that the cash was moved into more 'conservative investments', which still got significant hair cuts. Like I say, even if the dividend stream stays intact, it is hard to watch 50% of your life savings evaporate on paper. It is also hard to feel paralyzed, being 100% invested and unable to take advantage of the crash.
Alex
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#10
My current REIT allocation is only around 2.5%. Though with 300 shares of ARCP to most likely be put to me in Januray, my allocation will grow to around 5%. I am also wanting to pick up some more DLR and O. Once my portfolio is complete, I will expect to have around 8% in REITs. Though I will push it up under the right conditions. I don't think I could go up the the 20% that Alex could have. Only because I own 42 acres of ranch land and a house that isn't part of my dividend portfolio. The house will be sold and we will downsize once the kids are out of the house (another 15 years). The land will probably eventually be sold, but not anytime in the near future. So counting those two items, my net worth is probably close to 25% allocated to real estate and will only grow with both notes being paid down.
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#11
Thanks very much for the thoughts, everyone. I am getting more keen on adding some O to my portfolio. The more I read about it, the more it looks like the best of breed, SWAN-type thing you can get in the REIT sector.
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#12
I am at 11.8% REITs in our dividend growth portfolio. The denominator for that % is the total held in DGR stocks and does not include a cash position or Apple option positions.

I hold O, OHI, ARCP and DLR. I am not looking to add to my REIT holdings at this point, but I recently added to O and to DLR.
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