Considering REITs In a Dividend Portfolio

In a recent post I described some recent transactions that I did to balance out my asset allocation. My focus is still on dividend stocks, but I strongly believe that investors need to be well diversified and have a properly structured asset allocation to be successful. One of the purchases I made was to buy the Vanguard REIT Exchange.

Why I Bought The Fund

Prior to the purchase of this ETF, I only had exposure to the Canadian REIT Market. The Canadian REIT market is only a small percentage of the overall REIT market in North America and I wanted to ensure I received exposure to that market. the overall index that the Vanguard tracks is the MSCI US REIT Index. Here are some details on the index from the MSCI site:

The MSCI US REIT Index is a free float-adjusted market capitalization weighted index that is comprised of equity REITs that are included in the MSCI US Investable Market 2500 Index, with the exception of specialty equity REITs that do not generate a majority of their revenue and income from real estate rental and leasing operations. The index represents approximately 85% of the US REIT universe.

Performance of the REIT Index Over Time

Performance has been strong over the past ten years and that is part of the reason to include it in my portfolio. Here is a chart that presents the returns for the index:

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In addition, REIT’s have been proven to have low correlation with equities which should help to reduce the portfolio risk. This chart provides details on this correlation – please be sure to visit this site to receive more details on how this correlation works. In summary, correlation measures how one investment performs in relation to another and asset classes with a correlation less than 0.70 or greater than -0.70 are considered to have relatively low correlation with equities.

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Tracking Details

Since the inception of the ETF, the fund has returned 12.49% while the underlying index obtained 12.48%. The interesting thing is that the fund’s return is higher than the index. Typically, an index fund will lag the index by the expense ratio. However, the Vanguard fund holds a small amount in cash which may have contributed to the higher performance.

My hope for this fund is to enjoy the diversification benefits and therefore a reduction in risk of my overall portfolio. The track record and lack of correlation with equities over the long term should help even out returns while at the same time provide additional opportunities to see my portfolio grow.

Additional Income from the REIT

The last benefit I get from the Vanguard fund is some additional income to my portfolio, which I plan to reinvest into additional assets as opposed to pulling the cash out. The current yield on the ETF shares is 3.10% which equates to a $1.98 per shares per year. This income will help to increase the overall return of my portfolio.

Summary

I believe that this purchase of a US REIT will help with my long term returns as well as to help manage the volatility in my account. I will be sure to keep you up-to-date on how it is performing in my monthly portfolio review posts. Let me know if you have REIT exposure in your portfolio and if so, which one did you choose.

(Photo Credit: Stella Levi)

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