There are plenty of terrific monthly income securities out there that can offer you a reliable income stream that can support you for the rest of your life. When most income-oriented investors go about constructing or building their income streams, they think about the upfront yield first. Everything else comes secondary. I believe that’s a mistake, especially for income investors with an investment horizon that exceeds a decade, and it’s not just about compromising on dividend (or distribution) safety either. It’s more about a company’s ability to offer a high magnitude of sustainable dividend growth over the long term….
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There are plenty of terrific monthly income securities out there that can offer you a reliable income stream that can support you for the rest of your life.
When most income-oriented investors go about constructing or building their income streams, they think about the upfront yield first. Everything else comes secondary. I believe that’s a mistake, especially for income investors with an investment horizon that exceeds a decade, and it’s not just about compromising on dividend (or distribution) safety either.
It’s more about a company’s ability to offer a high magnitude of sustainable dividend growth over the long term. And it’s this long-term dividend growth potential that I believe most income investors haven’t even bothered to consider when going on the hunt for dividend stocks.
Now, if you’re a retiree, you need a generous upfront yield. There’s no question about that. You’ll want to nab the securities that’ll offer you the biggest monthly paycheque ASAP, so naturally, you’re going to gravitate towards balancing yield and safety.
By safety, I mean both the long-term stability of the dividend as well as a minimal amount of downside risk for the price of a security. Even if you intend to hold a security for the rest of your life, you still don’t want an artificially high-yielding falling knife that’ll be worth less than half its value at some point down the road if ever you need to unexpectedly liquidate your position to take care of an unforeseen contingent event.
If you’re a retiree, it’s good to have a high upfront yield, but it’s not the most prudent strategy, nor is it the most enriching when you consider the fact that many of today’s retirees could live well past 90 years of age.
So, if you plan to hang up the skates at 60, you’re going to be holding your investments for three decades or possibly more, and within that time span, you can count on unfortunate contingent events (health issues, unfortunate incidents, etc.) that’ll require you to cough up an exorbitant amount of cash. Moreover, by thinking long term, by finding the perfect balance of growth, yield, and safety, you’ll have more peace of mind, and if you don’t live past 90, you’ll at least have more (on average) to leave for your family, and that’s never a bad thing!
With many high-yielding securities (like large REITs), the income payouts don’t increase at the same rate as your average dividend-paying common stock. REIT distribution hikes, on average, happen rarely, and throughout many decades, your payout would probably only be doing marginally better than the rate of inflation, which isn’t great if you want to continue to grow your purchasing power throughout decades.
I’m not trying to scare you. Rather, I’m just trying to drive home to the point that your retirement years could span a lot longer than you originally anticipated. A common fear of many retirees is that they’ll run out of money at some point. If you spend every penny of your monthly income payout, you aren’t growing your wealth, and an unforeseen expense could permanently leave a dent in your income stream, causing you to cut back on your monthly spending.
Just because you’re in retirement doesn’t mean you should forget about “growth.” Growth is a spectrum, and if you bias yourself on the side of a high yield, you’re trading off peace of mind and a richer future for the now for a higher payment over the near term, and this trade-off may not be in every retiree’s best interests.
So, what’s the best REIT that considers growth? Look to smaller, more agile growth REITs like Inovalis REIT (TSX:INO.UN). Not only does it have a higher-than-average yield at 8.3%, but the yield isn’t “artificially high” as a result of a falling security price. With a mere $230 million market cap, the REIT is well positioned to grow its payout at a quicker and more generous rate than many of its larger peers.
As for the REIT itself, it’s in the business of commercial properties within major European cities. With strong FFO growth and ambitious growth plans, Inovalis REIT is one of my favourite “growth REITs” that retirees should strongly consider supplementing their portfolio with if they find they’re overinvested in behemoths whose distribution payout has remained stagnant over the last few years.
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Fool contributor Joey Frenette has no position in any of the stocks mentioned. Inovalis is a recommendation of Dividend Investor Canada.