Since May 22 - the first day Federal Reserve Chairman Ben
Bernanke hinted at "tapering" quantitative easing - the S&P 500
has fallen nearly 7% while the yield of the 10-year Treasury note
has risen from 1.89% to 2.55%.
Some of the hardest hit stocks during this selloff have been those
with strong yields as higher interest rates have made their
dividends comparatively less attractive.
But is this selloff in dividend stocks overdone?
The Fed Giveth, the Fed Taketh Away
A common misperception is that over the last couple of years,
yield-starved investors bid up all dividend stocks to untenable
valuations and that this recent selloff is just a normal correction
for these overbought securities.
That may be the case for some dividend stocks - but not all.
In fact, one of the hardest hit groups has been real estate
investment trusts (REITs). But there are many REITs with strong
fundamentals there were trading at very reasonable prices before
the recent "dividend off" trade.
And after this recent selloff, these stocks look even more
appealing for the long-term investor. In fact, from a valuation
standpoint many of these stocks are now trading at discounts to
their historical averages, which encompasses eras of much higher
3 Oversold REITs
Below are three REITs with strong fundamentals trading at very
reasonable prices. While they might be out-of-favor right now, this
dip could prove to be a good buying opportunity for the long-term
Mid-America Apartment Communities
Price Change since May 22: -15.8%
Current Price / Forward Funds from Operation (FFO): 12.4x
Historical Price / Forward FFO: 13.8x
Dividend Yield: 4.4%
MAA is an apartment REIT focused on the Sunbelt region of the
United States. It has over 49,000 apartment homes. MAA, like many
apartment operators, has been seeing strong increases in rental
rates along with multi-year high occupancy rates. Rising interest
rates shouldn't change this trend. Despite solid industry
tailwinds, shares are currently trading at a discount to their
10-year historical forward FFO multiple.
Chesapeake Lodging Trust
Price Change since May 22: -14.7%
Current Price / Forward Funds from Operation (FFO): 11.0x
Historical Price / Forward FFO: 11.6x
Dividend Yield: 4.7%
Chesapeake Lodging Trust is a REIT primarily focused on
upper-upscale hotels in major business and convention markets and
premium select-service hotels in urban settings or unique locations
in the United States. It currently owns 18 hotels with a total of
more than 5,400 rooms in eight states and the District of Columbia.
Management believes current industry dynamics will allow the
company to acquire hotels at prices below replacement costs with
attractive yields and upside potential. The stock yields close to
5% itself and trades below its historical median forward multiple.
Price Change since May 22: -16.1%
Current Price / Forward Funds from Operation (FFO): 11.8x
Historical Price / Forward FFO: 12.3x
Dividend Yield: 5.1%
Highwoods Properties is a REIT that focuses primarily on offices,
although it does own some industrial and retail properties. The
company owns or has an interest in 334 properties encompassing
approximately 35.0 million square feet, along with approximately
649 acres of development land. Its properties are primarily located
in the southeastern United States. Highwoods has taken it on the
chin the last few weeks like many other REITs, but investors who
get in now will pay less than 12x forward FFO and receive a stellar
The Bottom Line
Talks of the Fed tapering QE have sent many dividend stocks
plunging, especially real estate investment trusts. But these three
high-yielding REITs all have strong fundamentals and are currently
trading at very reasonable prices. This could present a great
buying opportunity for the long-term investor.
Todd Bunton is the Growth & Income Stock Strategist for
and Editor of the
Income Plus Investor service
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