Don’t Let One Bad Apple Destroy The Pie

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My latest reader spotlight goes out to billinsd in the sunny state of Florida. After reading my June 2 write-up, “Big Safe Dividends: Can You Have Your Cake and Eat It Too?” he commented with a thought-provoking, article-inspiring story:

“I recall one particular day, I was supervising a craps game. I admit to knowing basic craps, but we were short on supervisors. Craps payers are loud, full of advice, and sometimes obnoxious while drinking.

“One player was betting all of the hard-way bets. The other player and so-called expert [was] betting all of the conservative craps bets. Of course, the expert was full of obnoxious advice.

“Those are sucker bets. Don’t bet the sucker bets.’ He tried to control other players.

“Well, on this particular day, the only numbers coming out were hard-way bets. I politely corrected the expert, ‘Sir, they are all sucker bets if they don’t win.’

“Money was made that day.

Great article, Brad. My rule of thumb is the higher the yield, the higher the risk. However, I still add higher yields in lower amounts.”

It’s a very wise way of looking at the game in question, gambling in general… or any other kind of money-making effort. And while I hate to make a comparison between gambling and investing, it completely applies to the latter just as much as the former.

As I made known in “Big Safe Dividends,” I like working with specific strategies and rules. But I’m not going to die with them.

Why bother when there are better ways to live?

Do Your Due Diligence; Never Assume

Let me explain that last comment a little further.

For those who didn’t read “Big Safe Dividends,” here was its premise (and how it began):

“Is this title true or mere clickbait?

“Is it possible to own a big dividend stock that’s also safe?

“If you’re a regular reader of mine, you’re forgiven for doing a doubletake at today’s headline. After all, my regular sermon warns against buying ‘sucker yields.'”

By “sucker yields,” I mean dividend-paying companies that can’t match their earnings with their dividend payouts. As such, the high yields they offer are unsustainable and liable for a cut.

Then again, just because a yield is high doesn’t mean it’s automatically for suckers. You have to evaluate each company in and of itself to determine what’s what, how, and why.

That’s true of most strategies and rules. They’re great as guidelines, but you don’t want to worship them. Any more than you want to worship a single company, no matter how solid it seems.

This brings me to a famous saying by a famous investor, Sir John Templeton:

“The only investors who shouldn’t diversify are those who are right 100% of the time.”

Why should we take his advice?

Well, as explains, he “started his Wall Street career in 1938 and went on to create some of the world’s largest and most successful international investment funds.”

Now, to stay true to my “don’t die by the rules” theme, I do have to add that Warren Buffett is known for saying,

“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”

So, if you know what you’re doing 100% of the time, by all means, sidestep spreading out your money across different assets, asset classes, and asset sizes.


The Truth About Warren Buffett

That second-to-last line was pretty tongue-in-cheek, as I’m sure you could tell. But I do have to give Buffett his due in saying this…

You can probably over-diversify, obsessing over having everything assigned according to some “perfect” formula. Give yourself a break, understanding that you’re an individual with individual goals, needs, abilities, and temperaments.

For my part, I definitely have my favorite holdings – like Realty Income Corporation (O) – that take up more of the pie than other ingredients. But I still make sure to have a range of:

  • Large-cap, mid-cap, and small-cap companies;
  • Industry (sector-specific);
  • representative Geographic plays.

That way, if the West Coast is suffering, it won’t automatically affect the Sunshine-Belt focused companies I’m also invested in. Or if one small-cap company I found enticing turns out to be a flop, my more stable holdings are there to buoy my portfolio anyway.

You’re never going to be right 100% of the time, no matter how smart or well-connected you are. Case in point: Even Buffett has made the wrong calls.

But the reason why Buffett has succeeded – apart from his excellent connections, solid research team, and the training he got as Benjamin Graham’s protégé – is that he has, in fact, diversified. Whether he admits it or not.

He doesn’t own just one stock. His Berkshire Hathaway (BRK.A) (BRK.B) portfolio is spread across many companies, not just one or two or three.

Berkshire Hathaway holdings

Source: Wikipedia

The above list is just the publicly traded companies owned by Berkshire Hathaway (and ETFs) and does not include the operating subsidiaries (companies for which Berkshire Hathaway owns wholly or controls a majority) that total around 70 companies.

That’s how, even when he loses out big on something like, say, airlines, he can still deliver solid shareholder returns.

Berkshire Hathaway stock

Yahoo Finance

3 Core Positions In The Durable Income Portfolio

Like Buffett, we analyze real estate securities in an effort to achieve optimal portfolio results, and our track record speaks volumes:

Durable Income Portfolio


As you can see, our Durable Income Portfolio (that was launched in 2013) has returns just under 16% annually (for over 6 years now), crushing ETFs like (VNQ), (IYR), (MORT), and (SPY) .

The key to the success of this particular strategy is that the blueprint is based on selecting the highest-quality REITs with a sprinkle of higher-yielding preferreds and mREITs. As you can see (below), the portfolio is well-diversified across property sectors:

Durable Income Portfolio sectors


Let me assure you that our track record does not include all homeruns, although we did have our fair share of success over the years with picks such as:

Essential Properties Realty Trust, Inc. (EPRT), a net lease REIT that has generated over 70% annualized returns since our first pick in March 2020. We sold a slug back in April and August 2021, and we’re back adding again now.

EPRT stock price


Another example is City Office REIT, Inc. (CIO), an office REIT that we bought in December 2020 and sold in August 2021. During that time, shares have returned over 71% annually.

City Office REIT stock


With approximately 40 REITs in the portfolio, we’re anything but equal-weight. Our strategy is rooted in fundamental analysis in which we score each constituent based on their overall quality score. We have learned that in order to deliver superior results, we must maintain strict guidelines with regard to:

  • the sustainability of the earnings stream;
  • the health of the balance sheet;
  • the safety of the dividend;
  • the track record of the management team.

All of the REITs in our coverage spectrum are screened and scored based on these primary attributes. If the company is considered a Tier 1 name, we will apply a weighting of 3% or higher… but only if there’s a distinguishable margin of safety.

In other words, the valuation score is just as important as the quality score.

We maintain real-time research at iREIT on Alpha in which we maintain buy and trim targets, so whenever a high-quality REIT drops below our buy target, we will consider allocating more capital to the name.

Our goal is not to chase yield – that’s actually contrary to our business model – instead we always adhere to the same principles of Graham and Buffett.

“An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.” (Graham).

So far in 2022, we had the opportunity to add new money to these three REITs below – that are also our core positions that approximately represent 14.3% of the total portfolio holdings. Collectively, these 3 REITs have returned ~20% annually since inception.

  • Realty Income: 15.3% annualized returns since July 2014;
  • American Tower Corporation (AMT): 20.6% annualized returns since January 2021;
  • VICI Properties Inc. (VICI): 26.3% annualized returns since July 2019.

Let’s take a closer look at these core positions…

Realty Income is a net lease REIT that owns over 11,00 freestanding properties located in the US (all 50 states) and Europe.

We have been accumulating shares in this stalwart since 2014, and we added shares consistently up until July 2016, where we trimmed significantly (at $71.47).

We began buying again in 2017 (at $55) and 2018 ($49) and we sold a large tranche in February 2020 (at $72.89). Then, in March 2020, we began accumulating in bulk, buying tranches in at 49.86 (March), 46.81 (April), 61.28 (December) and 57.20 (Jan 2021).

Although shares are trading below our Buy target currently, we have opted to deploy capital into other peers like Store Capital Corporation (STOR) and Essential Properties Realty Trust, Inc. (EPRT).

Realty Income 12 year chart

Fast Graphs

American Tower is a cell tower REIT that owns 221, 000 global tower sites in 25 countries located on six continents.

Our first purchase in AMT was in January 2021 (at $223.92), and then we tripled down in March 2021 when hitting $213.77. We topped off the allocation with another tranche in April 2021 at $236.91.

As part of our strategy to allocate more capital to the “technology trifecta” (we refer to as towers, data centers, and logistics), we were happy to get an opportunity to own AMT.

As viewed below, shares have generated 20% returns (since our first purchase) compared to 13.5% for VNQ.

AMT 8 year chart

Fast Graphs

VICI Properties owns a diverse portfolio that consists of 43 gaming facilities comprising over 122 million square feet and features approximately 58,700 hotel rooms and more than 450 restaurants, bars, nightclubs and sportsbooks.

We first began covering VICI in 2019, and we added shares to the Durable Income Portfolio in July 2019 (at $21.37). In March 2020, we began to back up the truck (at $20.06) and added in August 2020 ($22.00), September 2021 ($29.03), November 2021 ($27.34), and then in May 2022 ($28.41).

At the open of trading on Wednesday, June 8th, VICI will enter the S&P 500, validating the potential we knew existed in this once-unknown gaming REIT.

Along the way, VICI has evolved into our third-largest position, and shares have returned an average of 26% for the portfolio.

VICI 6 year chart

Fast Graphs

How Many REITs Do You Own?

I always get the question,

How many REITs should you own?

My textbook reply to that question is that it depends on your risk profile and whether you plan to own REITs during retirement.

Another factor to consider is whether you’re seeking income, growth, or a combination of the two.

The fact of the matter is that you really don’t need to own 40 REITs, and in general I recommend owning around 20 names (equal weight, that’s 5% each).

Also, you must consider your other portfolio holdings and how diversified you are across all asset classes.

And as much as I like REITs, it’s important to spread your hard-earned capital across other categories including BDCs, MLPs, Utilities, Railroads, Banks, and Builders (we cover all of these at iREIT on Alpha).

Regardless of your risk profile, I must remind you that the most important thing to remember is

“Price is what you pay. Value is what you get.”

Good luck and thank you for reading!

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