After this weekend, my nestwill be empty.
In fact, right about the time you read this article, I'll be
loading the car in preparation for a 33-hour drive to Nashville,
Tenn. That's where my remaining homebound daughter, 25, will be
striking out on her own.
There's nothing particularly unusual about a grown child leaving
home, of course. After all, it's a scene that plays out hundreds,
if not thousands of time a day across the United States.
But that's the point...
In recent years, an increasing number of debt-laden and
job-challenged 20- and 30-somethings (including my daughter) had
little choice but to move back home with mom and dad. Only 11% of
25- to 34-year-olds lived with their parents in 1980, according to
Pew Research. By 2000, that number increased to 15.8%, and by 2010
the percentage was up to 21.6%.
These days, however, there's evidence to suggest the tide is
turning -- a demographic shift that could provide economic relief
forbaby boomer parents and opportunities for investors.
Thanks to a gradually strengthening U.S.economy , many young
adults (including my daughter) are finally making their move --
from their parents' basement to their first apartment rentals. To
help meet the anticipated growing demand for rentals,revenue from
apartment and condominium construction will grow an average 10.6%
annually to more than $44.9 billion by 2017, according to research
"As this group's members increasingly move out of mom and dad's
or out of the dorms, their share of demand for apartments will
grow, pushing up overall demand for rental properties," IBISWorld
When my daughter -- and her growing legion of cohorts -- moves
into her first apartment, she'll have created a "household." Inreal
estate parlance, a new household is formed when a couple marries or
a child leaves home.
Until recently, household formation hovered at historically low
levels. But that's changing in a big way.
During 2008 to 2011, as economic circumstances caused many young
adults and others to retrench, an average of 650,000 new households
formed per year. In the 12-months ended last September, formation
soared to nearly 1.2 million households -- most of them of the
multifamily variety -- as the economy showed signs of
And there's still room to run, particularly on the rental
In anCEO of
Associated Estates Realty (
, areal estate investment trust (REIT) , wrote in his
company'sannual report that nearly 70% of 5.5 million new
households between 2012 and 2016 will be renters.
Carla Pasternak dubs this era "Renter Nation."
In herissue , Carla assessesinvestment opportunities in the
multifamily sector -- all with a focus on income, of course --
including a look at REITs in general and the aforementioned
Associated Estates Realty in particular.
: Several REITs made Carla's list of "Ten Retirement
Savings Stocks That Can Give You the Second Income You're
Looking For." Some of thesestocks pay quarterly. Others pay
monthly. Alloffer you a safe, stable, and reliable source
of high income even if themarket goes down. To learn more,
for an audio presentation or
click here for the text version
. And if you already subscribe to
, you can access Carla's report directly by
following this link
In the following interview, Carla explains REITS and names her
favorite apartment play right now, a growing small-cap that's
currently yielding 4.4%.
Let's start with the basics. Explain REITS.
REITs (pronounced "reets"), short for real estate investment
trusts, offer some of the richest dividends on the market today.
These unique stocks make theirmoney by investing in real estate.
Many own land or buildings directly and make their money by renting
out this available space. Meanwhile, others hold real estate
related assets such as mortgage-backed securities.
Some REITs may yield 10% or better, but most average 5% to 6%.
That's more than double the average 2.5% yield sported by the 407
dividend-paying stocks in the S&P 500.
What's behind the big payouts? Simply, REITs are legally
required to pay out 90% of theirtaxable income as dividends. In
return, REITs can deduct these payouts from their reported income
for tax purposes. As such, most REITs pay little to notaxes .
One hitch is that since REITs don't payincome tax , their
dividends are mostly taxed asordinary income , up to 39.6%. Unlike
other stocks, REITs don't qualify for the 15% or 20%
"qualified"dividend tax rate . Even after the higher tax rate,
though, REIT dividends willput morecash in your pocket than most
otherinvestments . In addition, you can defer taxes by stashing
your REITs in a tax-advantagedIRA or avoid taxes altogether by
placing them in aRoth IRA .
What's your top apartment REIT right now?
Associated Estates Realty, which you referenced above, is a
relatively conservative play on the multifamily housing recovery.
Currently, AEC owns 52 multifamily properties with a total of
13,950 units in 10 states. In the past several years, it expanded
to higher-growth markets such as the Washington, D.C. metro area,
southeast Florida, and Dallas.
Management focuses on the millennial generation, as it believes
renting is a preferred and in some cases permanent lifestyle for
some in the 21-34 year age group. In one new apartment complex, for
instance, it added such high-end features such as granite
countertops, stainless steel appliances, deluxe cabinets and nine-
to 11-foot high ceilings to attract and retain these clients.
For the first nine months of 2012, AEC had adjustedfunds from
operations (AFFO) of 93 cents a share and distributed 53 cents, for
a sustainablepayout ratio of 57%. In the comparable period of 2011,
an AFFO payout ratio of 66% still resulted in distribution hikes,
so further increases are possible.
AEC provides a solid yield of 4.4% and is projected to have
double-digitFFO growth. The payout ratio is low and allows for
further distribution growth. Theshares are suitable if you're
seeking a relatively conservative play on the multifamily housing
Will dividend payers continue to outperform in 2013?
If history is any guide, then dividend payers will outperform
non-payers over the long-term. Numerous studies show that dividends
account for more than half the returns of the S&P 500 over the
decades. For example, according to a recent report by Henderson
Global Investors, during the past seven decades, from the 1940s
through 2010, dividend payers contributed 52.7%, or more than half,
of the total returns of the S&P 500.
The study also found that high-yieldingequities historically
outperformed lower-yielding equities. A look at the average
12-month relative returns among the top 1,500 performing stocks
during the period from 1978-2011 shows that the best performing
stocks, when ranked bydividend yield , are those in the first
quartile, with above-average yields.
In 2011, 100% of thestock market's returns were from
dividend-paying stocks, and last year dividends accounted for about
half of total returns. But even more important than these stats to
individual investors like you and me is that dividends provide you
with income you can pocket today, not just the promise of capital
Aside from REITS, what types of dividend payers are piquing your
interest right now?
As readers of
know, I've been favoring plays on the housing recovery, whether
these are real estate investment trusts like AEC or common shares
Home Loan Servicing Solutions (Nasdaq: HLSS)
, which have surged a dramatic 35% since being profiled as my
"High-Yield Security of the Month" in theequity firms, many of
which are organized aslimited partnerships or Goldilocks conditions
"Renter Nation: The Incredible Housing Story Nobody Is
Analyst Uncovers Instant Income Glitch in theFinancial
I promised my daughter we won't sublet her room ("just in
case"), tempting as that may be given the current surge in demand
for rentals. But I'm interested to know if there's anecdotal
evidence to build on here...
Do you have a child who recently moved to an apartment for the
first time, or is about to? Write us at
Insider@StreetAuthority.com. Conversely, if you're a 20- or
30-something who's formed a new household of your own during the
past year, tell me your story.
Action to Take -->
But if all you want to do right now is learn about investments that
can hand you a "second income" as much as 14 times what you can get
withCDs , seven times higher thanbonds , and as much as three times
higher than brand-name Dow stocks, then simply follow this
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