The Debt Ceiling Showdown… Plus: Why REITs Deserve A Place In Your Portfolio…
We haven’t spent much time talking about the prospect of a government shutdown in these pages, but perhaps it’s time we do just that.
Up until now, lawmakers on both sides of the aisle are playing a game of chicken. At stake is the debt ceiling, which is the maximum amount of money the U.S. government can borrow through the issuance of treasuries.
This limit has been raised or suspended through the years. But you may remember a similar showdown in 2011, when Standard and Poor’s stripped the U.S. of its AAA credit rating, and again in 2013, when a showdown led to a government shutdown for 16 days.
Fast forward to today. The U.S. government’s fiscal year ends tomorrow, the 30th. And the debt limit is projected to be hit on October 18th. Previous attempts to force a bipartisan vote to suspend the debt limit and fund the government have failed. And U.S. Treasury Secretary Janet Yellen has warned lawmakers that if a deal is not reached, then the government is at risk of defaulting on its debt, which could lead to an economic crisis.
Meanwhile, as we speak, the Senate and House are expected to take up measures that would decouple the debt limit and funding by adopting what’s known as a continuing resolution to temporarily fund the government through December.
“Swift passage in the Senate ultimately requires Democrats and Republicans to agree to adopt the funding stopgap unanimously. The proposal essentially would sustain federal agencies’ existing budgets until December 3.
At that point, Congress must either adopt another short-term fix, known as a continuing resolution, or take more decisive action to approve a set of appropriations bills that could boost agencies’ spending into 2022. No matter the course, the vote as soon as Wednesday would only delay another fight between Democrats and Republicans at a moment of great acrimony over federal spending.”
We’ll know by the end of the day or tomorrow whether we can breathe a temporary sigh of relief. But that simply means we’ll have to hold our breath and do this all over again once more in December.
Editor’s Note: In the meantime, for the remainder of today’s issue, I want to share a piece from my colleague Nathan Slaughter.
As some of you know, Nathan runs the show over at High-Yield Investing. For years, he’s been showing investors how to earn more income than they may have thought possible in this low-rate (and low-yield) environment.
How does he do it? Simple. By looking beyond the usual suspects and finding the kinds of income-machines you won’t hear about anywhere else…
Want More Income? Here’s Why REITs Deserve A Place In Your Portfolio
In an era of trillion-dollar deficits and inflationary Fed policies, there is nothing more reassuring than durable hard assets that hold their value. Gold has its luster, but no real utility or earnings power. That’s why many of the world’s richest and brightest businessman are sinking more and more of their wealth into real estate.
Property is a timeless investment. They’re not exactly making any more land, yet the world’s population is growing by 200,000 people (births minus deaths) each day. That’s over a million new people a week crowding into a fixed amount of space to live, work and shop — placing upward rental pressure on housing, office parks and retail strip centers.
But don’t just take my word for it. Here’s what some of history’s wealthiest business tycoons had to say.
“Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined.” – Andrew Carnegie
“Buy land near a growing city. Buy real estate when other people want to sell.” – John Jacob Astor
“Real estate cannot be lost or stolen, nor can it be carried away. Purchased with common sense, paid for in full, and managed with reasonable care, it is about the safest investment in the world” – Franklin D. Roosevelt
Forward-looking investors are putting their money where their mouths are, placing huge bets on land and buildings. Warren Buffett, for one, has strongly endorsed rental homes, and his Berkshire Hathaway company recently invested $377 million in a commercial property owner.
Billionaire media mogul Ted Turner owns more than a dozen sprawling ranches from Oklahoma to Montana. This collection spans 2 million acres (an area more than twice the size of Rhode Island), making him one of the nation’s largest private landowners.
Liberty Media CEO John Malone scooped up 1 million acres of timberland in Maine. And Sam Zell amassed a $5.5 billion fortune by investing in commercial office properties. His current portfolio includes housing in China, shopping malls in Brazil, and the Waldorf Astoria Chicago hotel.
Aside from generating stable monthly income, real estate can also be a great way to protect against the erosive impact of inflation and a depreciating dollar. Furthermore, its low correlation to equities can provide some buoyancy when the economy deteriorates and stocks are sinking.
Unfortunately, most of us don’t have the bankroll to buy an office tower, an apartment complex or a retail shopping center. But real estate investment trusts (REITs) offer a great way for investors of any means to participate.
These publicly traded vehicles come in many different flavors: apartment REITs, office REITs, industrial warehouse REITs, retail REITs, storage REITs, healthcare REITs. Some even own cell phone towers or highway billboards – any asset that generates rental income.
If you’ve ever bought and sold a house, then you understand that most properties appreciate in value over time. But the primary appeal of these securities is their income-producing potential. And there’s a kicker. Real estate trusts are exempt from federal income taxes, provided they distribute at least 90% of their taxable income to stockholders.
That special perk helps explain why the average REIT offers an annual dividend yield of about 4%, double the market norm.
Those dividends aren’t exposed to disruptive influences that other businesses must deal with… such as spiking raw material costs or changing consumer fads. While companies like General Electric and toymaker Mattel have been forced to cut their dividends, most REITs maintain stable (or rising) distributions.
Keep In Mind…
There are a few caveats to consider.
Since REITs don’t pay corporate income tax, most of the dividends paid to shareholders are fully taxed as ordinary income. In other words, most REIT dividends don’t qualify for the reduced 15% dividend tax rate. Of course, investors can avoid taxes on these distributions entirely by holding REITs in a tax-advantaged account like a Roth IRA.
Furthermore, because they distribute most of their profits and retain little, these companies must frequently tap the capital markets to raise funding to grow their portfolios. A popular and cost-effective method to raise capital is through secondary offerings — selling additional shares of stock to the market. This typically weakens the price of existing shares (at least temporarily) and waters down earnings on a per-share basis.
Landlords in certain segments of the real estate world (mainly retail) have also struggled to collect the full rent due on their properties with many tenants shut down (or operating at reduced capacity) because of the pandemic. But there have been sharp improvements in recent months.
Overall, this asset class has been one of the best places to park your money over the long-haul. Between dividends and share price appreciation, REITs have been one of the market’s best performing asset classes over the past couple decades. That streak is alive and well through the beginning of 2021.
We own more than a few REITs in our portfolio over at High-Yield Investing. In fact, I’ve even selected a REIT as one of my “bulletproof” picks in my latest report…
I wrote this report with one goal in mind… To give investors an idea of just how simple it can be to create (and preserve) long-term wealth with the right picks. With just a few picks like this, you can build wealth, sleep well at night, and watch the income roll in year after year.