Going Beyond Common Stocks For Income

6/13/2016


We know you like income. While our stock-selection approach targets total returns rather than pure income, we know that high-yield securities such as real estate investment trusts (REITs) and master limited partnerships (MLPs) appeal to many of our readers.

Because of that thirst for income, we created the Alternative Income Watch List, accessible at www.DowTheory.com/Go/Alt. We assign A (above average), B (average), or C (below average) ratings to 46 REITs and 29 MLPs. While these securities make sense for some investors, think carefully before you buy them. In particular, consider the following four points:

• The Forecasts doesn't recommend many of these stocks. In fact, our buy lists feature no REITs and just one MLP, Long-Term Buy EQT Midstream Resources ($75; EQM). Our A, B, and C ratings don't rank companies relative to the broad stock market, instead comparing them to others in their group. Most of the REITs and MLPs on the Watch List don't have enough appeal on their own to warrant a place in a portfolio. However, our Top 15 Utilities portfolio (www.DowTheory.com/Go/Top15) includes EQT Midstream and two other MLPs, Spectra Energy Partners ($47; SEP) and Star Gas Partners ($9; SGU).

• REITs are trust units and MLPs partnership units. While both trade like common stocks, their unusual corporate structures provide tax protections under the right circumstances. REITs and MLPs tend to pay higher dividends, and at times cause tax complications for investors.

• When REITs return at least 90% of net income to shareholders, they avoid corporate taxation, which allows for fat payouts. However, investors may have to pay taxes on some of the distribution at ordinary-income rates, rather than the lower rate for most dividends. The REITs covered in our Watch List own properties or other assets and generate much of their income from rent. We no longer cover mortgage REITs, which invest in mortgage-backed securities and usually use leverage to amplify returns; our traditional analysis tools may not work well for these securities.

• MLPs that generate 90% of their cash flows from "qualifying sources" don't pay taxes at the corporate level. Investors who own MLPs will receive K-1 forms at tax time; dealing with those forms can be a pain. Qualifying sources include natural resources, commodities, and real estate.

Both REITs and MLPs have outperformed the typical stock so far this year, and indexes of REITs and MLPs have delivered superior returns over longer periods as well. However, past results don't guarantee future returns.

Are we advising readers to avoid MLPs and REITs? Not exactly. Just make sure you know what you're buying. For more information, visit www.DowTheory.com/Go/REITs and www.DowTheory.com/Go/MLP. And if you do decide to invest in REITs or MLPs, stick with our A-rated options.

ALTERNATIVE-INCOME OPTIONS
Below we present real estate investment trusts (REITs) and master limited partnerships (MLPs) from our Alternative Income Watch List. We present only those securities earning A (above average) or B (average) ratings. Average yields, market values, and Quadrix scores take into account all of our monitored REITs (46 companies) and MLPs (29), including those rated C (below average). The 12-Factor and Reranked Overall scores compare REITs to other REITs and MLPs to other MLPs. We generate Quadrix scores for 223 REITs and 109 MLPs.
Stock-
Market
Value
($Bil.)
---------- Quadrix Scores ----------
Group-Specific
----- Scores -----
Company (Price; Ticker)
Div.
($)
Yield
(%)
Momen-
tum
Value
Quality
Overall
12-
Factor
Reranked
Overall
Rank
Industry
Real estate investment trusts
Alexandria RE Equity
($97; ARE)
3.20
3.3
7.0
50
14
46
33
53
49
B
Office
American Tower
($108; AMT)
2.04
1.9
46.0
57
26
75
48
31
29
B
Specialized
Apartment Investment
($40; AIV)
1.32
3.3
6.3
57
17
72
48
82
71
B
Residential
Avalonbay Communities
($170; AVB)
5.40
3.2
23.3
62
21
76
48
58
57
B
Residential
Boston Properties
($128; BXP)
3.85
3.0
19.7
72
32
79
60
79
65
A
Office
Corrections Corp.
($34; CXW)
2.16
6.3
4.0
65
51
54
72
99
96
A
Specialized
Digital Realty Trust
($103; DLR)
3.52
3.4
15.1
39
8
47
30
64
53
B
Specialized
Duke Realty ($25; DRE)
0.72
2.9
8.6
78
11
45
43
72
87
B
Industrial
Equity Lifestyle
Properties ($72; ELS)
1.70
2.4
6.6
68
17
80
52
95
58
B
Residential
Equity Residential
($64; EQR)
2.01
3.1
24.6
52
45
94
50
21
6
B
Residential
Essex Property Trust
($209; ESS)
6.40
3.1
13.7
91
18
72
53
68
73
B
Residential
Extra Space Storage
($91; EXR)
3.12
3.4
12.0
92
11
88
51
54
23
B
Specialized
General Growth
Properties ($28; GGP)
0.76
2.8
26.1
60
15
76
44
66
54
B
Retail
Hospitality Properties
($27; HPT)
2.04
7.7
4.0
71
64
55
72
100
95
A
Hotel & resort
Host Hotels & Resorts
($16; HST)
0.80
5.1
11.8
63
68
77
71
78
58
A
Hotel & resort
Iron Mountain ($37; IRM)
1.94
5.2
7.9
68
25
38
39
54
46
B
Specialized
Kilroy Realty ($62; KRC)
1.50
2.4
5.7
88
39
78
66
59
56
A
Office
Kimco Realty ($29; KIM)
1.02
3.5
12.1
45
29
80
58
91
75
B
Retail
Lamar Advertising
($65; LAMR)
3.00
4.6
6.3
64
32
82
67
97
79
A
Specialized
LaSalle Hotel Properties
($23; LHO)
1.80
7.7
2.7
28
75
71
57
67
31
B
Hotel & resort
Liberty Property Trust
($38; LPT)
1.90
5.0
5.6
60
46
55
60
81
70
A
Diversified
Macerich ($78; MAC)
2.72
3.5
11.9
39
33
82
48
28
47
B
Retail
Mid-America Apartment
($98; MAA)
3.28
3.3
7.4
59
32
80
50
92
29
B
Residential
National Retail
Properties ($47; NNN)
1.74
3.7
6.7
71
19
52
47
92
67
B
Retail
Omega Healthcare
($33; OHI)
2.32
7.0
6.6
42
56
67
45
30
17
B
Health care
Prologis ($49; PLD)
1.68
3.4
26.8
83
19
62
56
85
85
A
Industrial
Public Storage
($252; PSA)
7.20
2.9
43.8
71
13
82
53
88
55
B
Specialized
Realty Income ($64; O)
2.39
3.8
15.9
44
14
48
27
42
13
B
Retail
RLJ Lodging Trust
($21; RLJ)
1.32
6.2
2.6
38
81
79
75
90
65
B
Hotel & resort
Simon Property Group
($201; SPG)
6.40
3.2
62.3
57
30
76
53
73
50
A
Retail
Summit Hotel
Properties ($12; INN)
0.53
4.3
1.1
90
87
83
98
98
99
A
Hotel & resort
Ventas ($68; VTR)
2.92
4.3
23.0
78
24
40
45
94
80
B
Health care
W.P. Carey ($67; WPC)
3.90
5.8
7.2
95
36
53
70
95
97
A
Diversified
Welltower ($72; HCN)
3.44
4.8
25.6
69
26
75
48
59
34
B
Health care
REIT average *
4.1
13.6
58
30
63
47
63
47
Master limited partnerships
Alliance Holdings
($20; AHGP)
2.20
0.1
1.2
4
99
60
65
87
86
B
Coal &
cons. fuels
Alliance Resource
Partners ($16; ARLP)
1.75
10.8
1.2
21
97
57
80
82
91
B
Coal &
cons. fuels
AmeriGas Partners
($46; APU)
3.76
8.2
4.3
58
40
48
47
53
43
B
Gas utilities
Buckeye Partners
($73; BPL)
4.80
6.6
9.5
35
43
48
37
72
37
B
Oil & gas
storage
Ciner Resources
($28; CINR)
2.26
7.9
0.6
49
89
80
92
51
97
A
Comm.
chemicals
DCP Midstream
Partners ($37; DPM)
3.12
8.4
4.2
37
42
47
45
51
41
B
Oil & gas
storage
Enbridge Energy
Partners ($23; EEP)
2.33
10.0
8.0
26
45
47
42
62
42
B
Oil & gas
storage
Energy Transfer Equity
($14; ETE)
1.14
8.1
14.7
54
86
85
76
100
90
A
Oil & gas
storage
Energy Transfer
Partners ($39; ETP)

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