For investors with at least $50,000 looking for high-yield, income-producing assets, it is always at a toss-up between buying and renting a home (or multiple homes) and buying dividend-producing stocks. Some dividend producers will also produce capital gains, but so will your average home over the long term.
The market will correct and the money coming out will be placed somewhere, probably on the hard asset “safe” side. In other words, people will sell stocks to buy real estate.
Now, there will be some greed kicking in as well because you can leverage your money a lot more in real estate. Fifty thousand dollars down gets you a $250,000 home, which would rent for $1,200 t0 $1,800 per month depending on your market. If you are in New York, Washington DC or San Francisco, $50,000 will not get you to first base; however, in most parts of the United States that will be enough to produce good cash on cash yields.
That means you earn 7% to 22% on your money. Given the average rise of houses just above inflation, you will have an asset that will be worth double over 20 to 30 years. I am not a fan of buying your own home as an investment, but buying rental properties should certainly be a consideration given most millennials will be forced to rent due to high costs and low wage growth.
You could also buy stocks with exposure to the real estate market. Most pay healthy dividends, but you do not want to overpay for them. Just like you would not want to overpay for a rental property.
Here are a few stocks I believe will remain good long-term cash producers, which can be bought a low price-earnings multiples.
AGNC Investment Corp. (AGNC, Financial) was founded in 2008 and invests primarily in agency mortgage-backed securities on a leveraged basis. It pays a 10% dividend and has a $7 billion market cap. With an operating expenses less than 1% of total equity, AGNC has one of the lowest cost structures as a percentage of book in the space. It is also the largest internally-managed residential mortgage REIT and one of three with a market cap over $5 billion. The REIT has paid dividends since 2008. The stock is selling for less than $22 and its paying out roughly 20 cents a month right now.
Apollo Commercial Real Estate Finance Inc. (ARI, Financial) acquires and manages performing commercial first mortgage loans, subordinate financings, commercial mortgage-backed securities and other commercial real estate debt investments. The stock has a market capitalization of just under $2 billion and pays a 10% annual dividend on a quarterly basis. The company’s CEO and chief investment officer are both from Apollo Global Management’s Real Estate division, and the team has done a great job managing risk and building a solid cash producer. The financials stack up very well. Apollo has 94% profit margins, 93% payout ratio and $150 million in net income on $1.8 billion in total debt.
Other companies in this sector like Chimera (CIM, Financial), Two Harbors (TWO, Financial) and New Residential (NRZ, Financial) looked good on the surface, but when I dug into the numbers, it became apparent that operating margins need to be close to 95% to really be worth owning.
Disclosure: I do not hold positions in ARI or AGNC.
