Brad’s Note: Last year I sat down with Chris Lowe, Editor in Chief for Legacy Research. And as this year comes to a close, this conversation is more relevant than ever.

For those who don’t know him, Chris has covered the biggest trends in the investing world for his readers. And one that aligns with the demands of today’s economic and investing landscape is the power of generating income.

We discussed how I learned this the hard way: By making millions and losing it all… How I built back my wealth through “stock market real estate”… And how you can do it, too.

Today, I’d like to share an excerpt from our conversation with you.

It’s valuable insight that can help you through periods of high inflation, recessions, bear markets, and every ugly scenario… And let you see these situations as opportunities instead.

Chris Lowe: Brad, thanks for talking to me today.

Brad Thomas: You bet. Nice to see you.

Chris: Let’s kick off with your background. You didn’t start out as an investment advisor. You started as a real estate guy. Tell me about that journey.

Brad: My experience building wealth wasn’t always a pleasant one.

Right out of college, I knew I wanted to get into real estate. I already had my real estate license. That was what I wanted to do.

So, I got into the industry. And I learned in the trenches. After working as a leasing agent in a shopping center, I understood how the value-creation process was generated in real estate.

I became a developer. I took on more risk and borrowed money to build. And I started small, with some smaller buildings and freestanding properties.

I was building properties for Advanced Auto Parts and Blockbuster. Then I graduated up to bigger clients such as Walmart, PetSmart, and Barnes & Noble.

I was also a franchisee. I bought two Papa John’s franchises and two Athlete’s Foot franchises.

At the peak of my real estate career, I had more than 100 rent checks coming in every month.

But there was a transformational moment in my life. It was called the Great Recession of 2008.

I lost everything in the crash – my properties, franchises, millions, and career. I was flat broke… with five children to feed.

That’s when I decided it didn’t make sense to try to build my wealth with various real estate partnerships with complicated tax returns. Investing in real estate through the stock market seemed like the intelligent, sustainable way to go.

The great thing about stocks is that there’s instant liquidity. In the pandemic and the Great Recession, it was difficult for real estate owners to sell property quickly. But with stocks, you can buy and sell every day. That’s a huge boon for investors.

In 2010, I started writing about this new strategy on a financial website called Seeking Alpha. And I now have more followers on that website than anyone.

Chris: You started to focus on stocks because they’re easier to buy and sell… but you focused in on a particular niche of the stock market with income-producing stocks. What led you to that decision?

Brad: Setting up reliable streams of income is important to investors of all ages. But it’s most important to those of us nearing… or already in… retirement. People like my mother, who is retired.

I used to generate most of my income as a developer through rent checks. Then, after the 2008 crash, I had to reboot and start finding new income streams in the stock market.

I think most investors want that as well. I call it “SWAN” investing. That stands for “sleep well at night.” I look for stocks that pay reliable, growing streams of income by way of dividend payments.

Chris: Tell folks a little bit about dividends. A lot of folks may be familiar with investing in the stock market for capital gains… but not necessarily for income.

Brad: As an investor, you should be thinking in terms of both. Your total return is your dividend income plus the capital appreciation as the shares you own rise in price. Those two come together to make up your total return.

The best total returns come from consistent dividend raisers. So, I look for companies that can generate income growth by increasing their dividend payments over time.

Chris: You’re particularly interested in a special type of investment. It’s called a real estate investment trust, or a REIT. Can you explain for readers what a REIT is? What makes them different?

Brad: I published a book last year called The Intelligent REIT Investor. And I teach an entry-level course out of this book at New York University. I also just published another book called REITs for Dummies. So, REITs are in my wheelhouse.

REITs own income-producing real estate. And they pay out the rents they collect to shareholders. To legally qualify as a REIT, a company must pay out at least 90% of their taxable income in dividends. And most REITs pay out 100% of their net income to shareholders.

REITs have sold off with the rest of the stock market this year. But that’s great for us value investors. Because, thanks to lower share prices, you can buy REITs with dividend yields of 4%, 5%, even 6%, or higher.

[A dividend yield measures how much income a stock pays relative to its share price. Lower prices, all else being equal, mean higher yields.]

I caution folks not to reach for yields that are too high. The closer you get to double-digit dividends, there’s more risk baked into those companies.

The great thing about REITs – especially here in the U.S. – is that real estate is a $2 trillion market. And it’s very diverse. So, you have different types of REITs that own real estate in different niches.

It’s not just your basic apartments, or industrial and retail properties. We now also have cell tower REITs, data center REITs, cannabis growing facility REITs, and solar REITs.

Chris: One of the big worries our readers are talking about all the time right now is record inflation. Earlier this year, it hit the highest it’s been in 40 years. How do REITs work out during periods of inflation?

Brad: REITs own real estate. And real estate is a terrific inflation hedge.

The great thing about real estate is it offers pricing power. And again, we have all these different property sectors. So, we can go to those sectors that have better pricing power.

Take apartment REITs. I’m sitting in an apartment right now. About a year ago, I got a lease renewal offer. Guess what? It was a 60% rent increase.

Chris: Wow!

Brad: I tried to move out of this place. But I couldn’t. I’m in West Palm Beach. And all the rents having been rising like crazy. That’s pricing power.

The owner of this building isn’t worried about inflation. Sure, energy and maintenance bills go up. But so do rent checks.

Self-storage is another excellent play during inflation… again because of pricing power. Self-storage REITs can adjust rents every day. And they’re using sophisticated technology to help them monitor supply and demand to set rents.

So real estate is a great inflation hedge. Especially companies that have built-in rent increases.

And what’s happening now is the stars have lined up for REITs. Because now we’re seeing rising rates from the Fed and rising mortgage rates as a result. This has pushed down the share prices of REITs. That means higher yields.

So, there’s never been a better time than now to invest in REITs. Some carry yields of 5% and 6%. So, we’re looking at total returns – including the income plus share price appreciation – of 20–25% a year.

Chris: All right, Brad. That’s great.

I know you’ve rebuilt your wealth through REITs and income investing – so I’d encourage everyone to follow Brad and learn more about REITs.

Brad: Thanks so much. I really appreciate your time today.

— Brad Thomas

Source: Wide Moat Research