We now have a pretty clear picture that the Federal Reserve is going to raise interest rates steadily throughout 2017 after the initial rate rise last week. In fact rates could grow to 2% or perhaps 3% in the long term.
There are a lot of positive and negative implications from this move, one of the biggest being that it will now make the interest rate on cash (and bonds) higher, which could be positive or negative depending on your point of view.
In turn, this makes defensive stocks seem less attractive because a safer return for the desired yield can be found elsewhere.
Now that the interest rate rise is confirmed, the share prices of these defensive stocks will likely drop even further, however this will just make them more attractive in my opinion as their potential dividend yield increases.
Here are three real estate investment trusts (REITs) I also have my eye on:
BWP Trust (ASX: BWP)
BWP Trust is a warehouse owner with a market capitalisation of $1.85 billion.
It owns over 80 Bunnings warehouses and leases them to Bunnings, which is owned by Wesfarmers Ltd (ASX: WES).
Bunnings has been one of the best performing retail businesses over the last 10 years, it’s been so successful that its major competitor, Masters, couldn’t get a foothold and had to close.
Bunnings is a great tenant for BWP Trust, it signs very long leases, it can afford the growing rent because sales are growing faster than CPI and Bunnings continues to grow its network each year.
In FY16 BWP Trust grew its dividend by 6% and this year it is expected to grow it by a further 3%. It’s currently trading with a dividend yield of 5.88%, which could get higher because its share price dropped 3.36% on the day of the Fed announcement.
Scentre Group (ASX: SCG)
Scentre Group is the owner and operator of all Westfield shopping centres in Australia and New Zealand and it has a market capitalisation of $23 billion.
Scentre Group dropped by 2.47% on the day of the Fed announcement, but its underlying quality hasn’t changed. It has very good locations across a number of our large cities and it has high quality tenants who can afford rent increases.
It will be important to monitor how Scentre continues to develop its centres to keep them attractive to shoppers, as internet shopping may slowly start to steal more market share from physical stores.
Scentre grew its dividend by 1.9% in the six months to 30 June 2016 and is expected to grow the dividend in the second half of the year by at least 0.09%. It’s currently trading with a dividend yield of 4.84%.
Goodman Group (ASX: GMG)
Goodman Group is a global REIT which specialises in logistics and warehouses and has a market capitalisation of $12.2 billion.
On the day of the Fed interest rate change the share price dropped by 1.58%, but I think Goodman could be one of the best performing REITs over the next few years.
It has a very high-quality tenant list including Japan Post, Amazon and BMW. High quality tenants can afford the rent rises and may want additional locations which Goodman could provide, acquire or build.
In FY16 Goodman grew operating earnings per share by 7.8%, whilst the dividend grew by 8%. Operating earnings per share and the dividend are both predicted to grow by 6% in FY17.
This means that Goodman is trading with a forward dividend yield of 3.66%.
Today might not be the right time to buy these stocks, but they are some of the highest quality REITs on the ASX and for every percent that the share price drops, they look more attractive.
Of the three, Goodman is the one I have my eye on the most because of its diverse global operations and I think it has the best quality tenants.
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Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.