Man putting coin in piggy bank.
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“Americans Know They’re Not Ready for Retirement. But It’s Worse Than They Think.”
That was one of Barron’s attention-grabbing headlines in April. And the story only got worse from there.
It seems that Natixis Investment Managers performed a survey of 1,000 American workers – specifically those who had access to company-sponsored defined contribution plans. Covering baby boomers, Gen X and millennials alike, Natixis asked participants if they thought they were ready for retirement.
Two-thirds of respondents said yes, just as long as they’re careful. And three-quarters of them were willing to take the next step in declaring themselves financially secure in their upcoming retirement.
Considering the title Barron’s gave to this information, you already know the majority of them were wrong in those comfy, cozy assumptions. But here’s exactly why that’s true:
- They’re expecting to retire at a certain age, when they might actually have to retire earlier.
- They’re not taking into account how much they’ll need or how much things cost now and will cost then.
- They’re factoring in Social Security checks which, thanks to the short-sighted thinking of a national government that’s been bloated for multiple generations now, probably won’t exist by the time they actually retire.
As a result, Ed Farrington, executive vice president of retirement strategies at Natixis says that, “ The ability to live comfortably in retirement is a basic premise of the American Dream. ” Yet, “Right now, it’s just a pipe dream for many hard-working Americans.”
That’s disconcerting at best and downright depressing otherwise, not to mention dangerous.
It also begs the question of whether you fall into this survey’s norm. If so, listen up. Retirement 101 is now in session.
A Secret Retirement-Fortifying Weapon
If there’s any bright side to the Natixis survey, it’s that 1,000 workers is a laughably small piece of the American pie. According to The Statistics Portal, as of March 2019, there were more than 128 million Americans participating in the U.S. workforce as full-time workers.
With that said, Natixis and Barron’s aren’t the only two sources saying that Americans are not ready for retirement. Data from the Bureau of Labor Statistics, Transamerica Center for Retirement Studies, GoBankingRates, MassMutual State of the American Family and others all come together to form a rather bleak vision into the future.
But before you sink into the absolute depths of despondency, remember that you have a secret retirement-fortifying weapon on your hands: real estate investment trusts.
I’m not going to claim that REITs can deliver you from all evil. Obviously, they can’t. Nor can filling your whole entire portfolio with nothing but land-focused investments.
You need a strong balance that consists of as many properly diversified and growing assets as you can reasonably manage. It’s just that, as I’ve said a thousand or two times before – and will no doubt say a thousand or two times again – real estate income-oriented ventures should be a piece of that puzzle.
A decent chunk of it, in fact, due to the contrasting yet complimentary qualities they bring to the table. We’re talking about up to 10% to 20% of your total portfolio here. And it just so happens that one of the safest hands-off forms of investing in real estate are REITs.
They’re also awesome retirement fund-boosters.
If you’re one of my regular readers, you already know that. If you’re one of my newer readers though, let’s discuss exactly why that is.
As soon as we do, we’ll delve deep into some “Actionable” positions you can take today.
A Much More Soothing Study
Nareit, a very valuable REIT resource, highlights these trusts’ “high and stable income, long-term capital appreciation, diversification and inflation protection” qualities on its website. And it’s not wrong about any of that.
It’s also not wrong about the conclusions it reached based on research about target date fund (or TDF) portfolios studied from between 1975 and 2017.
“A TDF portfolio including REITs had a higher return and lower risk than a portfolio without REITs. The TDF portfolio including REITs returned 10.58% annually with an annualized portfolio risk of 9.31%. This compares to a return of 10.18% and an annualized portfolio risk of 9.57% without REITs. Over the 42-year investment period, the TDF portfolio using Surplus Optimization would have resulted in a portfolio value at the end of 2017 that is 16.7% higher than a portfolio without REITs.”
Please take note how that 42-year investment period includes the rare yet prominent times when REITs performed abysmally, such as during the housing bubble crisis. Yet they still came out that far ahead.
That’s definitely one way to help combat potential early retirements… almost certain cost of living increases… and Social Security funds drying up altogether.
And it’s reputable information like this that spurs me on to make the kind of recommendations you’ll find right below.
3 of My Strong Buy REIT Convictions
In the latest newsletter we put together a deep-dive of the Durable Income Portfolio, that has returned 12.6% YTD and around 10.5% annualized since inception (2013).
Today we decided to select three beaten-down picks in the Durable Income Portfolio, recognizing that they are high-quality names that should generate outsized total return performance.
Our first pick is CyrusOne (CONE), a leading data center REIT that generated solid first quarter earnings: normalized FFO per share of $.82 cents, beating the consensus estimate of $.78 cents. Revenue increased by around 14%, from $196.6 million to $225.0 million driven primarily by a 22% increase in organic growth and the Zenium acquisition, as well as additional interconnection services. Also interconnection revenue grow by 16% year-over-year, outpacing all of the data center REIT peers.
CyrusOne also maintains a very strong balance sheet and as a result of recent actions, the company said it was increasing the normalized FFO per share guidance by $0.20, which is a 6% increase on the previous guidance. The dividend is not expected to grow in 2019, but we believe there’s strong value to the upside, as we are maintaining a Buy, with the expectation that shares could return in excess of 25% over the next year or so. Shares now trade at $61.11 with a dividend yield of 3.0%.
Another deep conviction pick is Iron Mountain (IRM), a globally-recognized information management company. The majority of current revenue is being generated from developed market physical storage, which offers extremely attractive profit margins. The secret sauce for Iron Money is the company’s steady and strong retention rate of around 98%. Furthermore, the iconic brand has the logistics network built up over 68 years, to pick up, transport and store documents cheaper than just about anyone (talk about w wide moat advantage).
One thing I really like about Iron Mountain is the fact that the company has evolved into the data center business. Since 2017 the company has acquired or invested in over $1.5 billion of data center properties, that consists of 14 data centers located in dynamic markets.
Recently Iron Mountain guided for lower growth in 2019 (2.6% AFFO per share) and the company also missed ABITDA by around $10 million in the first quarter (largely due to rising labor costs management is addressing), and as a result the stock price dropped by almost 10%. We are maintaining a Strong Buy as shares trade at $31.60 with a dividend yield of 7.7%.
Finally, we are pitching Simon Property Group (SPG), right off of a terrific first quarter report quarter in which the company announced a 5.1% dividend increase (from $2.00 per share to $2.05 per share). As I explained in a recent Forbes.com article, “While many retail REITs are struggling to maintain their cash flow, Simon has several advantages that have allowed the company to continue to grow profits and dividends.”
I referenced Simon’s “scale advantage” that includes a “massive portfolio of over 230 Class A malls in North America, Europe, and Asia totaling over 190 million square feet of retail space” as well as “access to the lowest-cost of capital in the REIT industry”. Simon is one of a handful of A-rated REITs and its credit metrics are rock-solid (approximately $7 billion of liquidity as of Q1-19).
We are maintaining a Strong Buy on Simon shares, recognizing that the company is well-capitalized to generate solid growth in the future. Shares not trade at $179.41 with a dividend yield of 4.6%.
I own shares in IRM, SPG, and CONE.