Many ASX-listed high-yield stocks have outperformed the wider marker this year as investors have shifted from the low returns of term deposits to the higher, but riskier, returns achievable in the sharemarket. As all Foolish investors would have heard a million times, it’s been primarily the banks, Telstra (ASX: TLS), and reliable dividend payers like Woolworths (ASX: WOW) that have seen the big price gains over the last 12 months.
One group that still pays handsome dividends but that has lagged the S&P/ASX 200 (ASX: XJO) (Index: ^XJO) by around 8% this year is Real Estate Investment Trusts (or REITs). The Australian REIT sector pays an average dividend yield of 5.7%, compared with the market average of 4.6%, however most are unfranked.
The sector can largely be split into four categories: retail, residential, commercial and office real estate, and then there are micro segments within each. To further complicate things, each segment within each sector is affected differently by the macro (large scale) and micro (small scale) economies in which they operate.
A good example of this is retail property, within which there are specialty retailers (think Rebel Sport or clothing stores) and large retailers (think Coles or Bunnings). Specialty retail has struggled since the GFC due to increased competition from online and overall flat retail spending, while many large retailers, such as Woolworths, have gone from strength to strength.
Right now, industrial real estate appears to be one of the two best bets, with a stable market, high, sustainable rental yields, and a lack of new supply pushing up prices and demand. Demand is being spurred by online retailers setting up distribution centres in Australia, and the continued drive for supply chain management pushing up yields on high quality assets. Goodman Group (ASX GMG) operates in this space, has a strong growth outlook, and also has operations in China, Brazil and the US.
Residential property is the other booming sector and may be a key driver of share price growth over the coming year if the predicted property boom occurs. Australand (ASX: ALZ) has the greatest exposure to the Sydney market, which has seen the most growth so far, while Stockland (ASX: SGP) and Mirvac (ASX: MGR) also have large residential property exposures.
The above mentioned stocks yield between 4.2% and 6.2%, which should grow in line with, or above, inflation. Stocks in the sector yielding over 7% include Abacus Property Group (ASX: ABP), Cromwell Property Group (ASX: CMW) and Shopping Centres Australasia (ASX: SCP).
Investors can not, and generally do not, believe that the share prices of Australia’s banks and other high-yielding consumer stocks can continue rising as they have in the past year. Low interest rates are driving renewed investment in property and pushing up residential and commercial real estate prices. Investors looking for high, reliable yields could do worse than consider Australian REITs. Fundamental drivers of yield are positive in the industrial and residential property markets and investors would be best avoiding retail property exposure until the sector shows improved signs of recovery.
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Motley Fool writer Andrew Mudie does not own shares in any of the companies mentioned