George Doyle
If you're one of many who assumed real estate investment trusts could only climb higher, the past few months are a harsh reminder that nothing goes up forever.
The fall has come gradually, but in total the S&P/TSX Capped REIT index is down 8.5 per cent since peaking in mid-August.
This is a splash of cold water in the face of investors who piled into these trusts for their juicy yields. It's also a warning sign for the investment banks that relied on REIT financings as a stable source of revenue throughout the turbulence of the past few years. REITs were the gift that kept on giving, and now future issuances are much less certain.
To be clear, this isn't the end of days. Widen the time frame and you'll see that REIT valuations have simply fallen to June levels, which are still rich given their long run up. Plus, these trusts were never immune to market disruptions. When the markets crashed during the debt ceiling debacle in the summer of 2011, many REITs got hit hard.
But it's interesting to compare REIT performance relative to other sectors of the TSX. Since mid-August, trusty consumer staples are down only 2.3 per cent, and the materials sub-index is still up about 1.5 per cent.
REITs aren't the only surprise. Utilities are also in rough shape, falling almost 8 per cent over the same period, much of that coming as the fiscal cliff rhetoric heated up. Like their real estate peers, their fall is a bit perplexing because they also pay fat dividends.
Something similar is happening with U.S. dividend stocks because investors south of the border are scared of seeing their dividend tax rate go up once a fiscal cliff deal is struck. Currently, high-income earners get their dividends taxed at 15 per cent, and there's a proposal to see that percentage climb to their income tax rate.
However, the truth is that no one knows what will happen. And even if their tax rates go up, these nifty charts explains the predicament these investors will face. Sure, they can dump yield-rich stocks, but their alternatives aren't very sexy. Bond yields are still incredibly low.
Tim Kiladze