Why The Latest ‘Bad’ Inflation Is Our Key To Solid 8% Dividends (2024)

Since last week, markets have been hamstrung by the fear that inflation is going to hang around. So we (naturally!) are going to make a contrarian play on this overdone worry.

How? By picking up high-yielding closed-end funds (CEFs) focusing on real estate—particularly real estate investment trusts (REITs). Many of these are discounted now.

I’ll show you why this timely move is our route to locking in a steady (and monthly paid) 8.3% dividend in just a moment

First, let’s break down the so-called “bad” inflation number that came out last week, because there are some quirks about it that are easy to overlook.

First, the headline: Inflation, as measured by the consumer price index, was 3.1% in January, above the sub-3% level that pretty well everyone has been hoping for.

Why is 3% so important?

Because that’s where the Federal Reserve will likely start cutting rates. Above 3%, the worrywarts say, and the Fed won’t cut, inflation could accelerate, and we could get another 2022-style pullback.

Let’s just hold up here before we let fear get the best of us.

The 3.09% year-over-year price growth is better than the 3.14% in December, which shows a cooling that, while frustratingly slow, shows we’re still going the right way. In fact, this is the lowest reading since July 2023.

Another important point about inflation that people are ignoring: Shelter was the biggest contributor, rising 6% year over year in January.

What is shelter, exactly? It’s a mix of how much it costs to rent a residence (house or apartment), lodging away from home (so yes, if hotels are increasing their rates because of more travel, that will increase the shelter-inflation number) and owners’ equivalent rent of residences—a cumbersome term for a controversial estimation by the Bureau of Labor Statistics of how much it would cost homeowners to rent the property they currently live in.

In short, rents drove this inflation number the most. And the fact that landlords have the leverage to charge so much more also indicates the economy is not shrinking (if it were, landlords would have no choice but to cut rents, as they’ve done in every recession in US history).

That’s partly why stocks rose after investors realized this number isn’t all that bad. It’s also why real estate investment trusts (REITs) bounced after dipping alongside all other stocks last week, as evidenced by the benchmark SPDR Dow Jones REIT ETF (RWR RWR).

RWR is still down year to date, despite the rise in rents, which is increasing the income this funds’ holdings collect.

That’s the kind of contrarian setup that suggests REITs are good buys now, especially when we zoom out and see not only RWR’s big gains over the long haul, but the fact that it’s actually done better than the S&P 500.

This is likely no surprise to you if you’ve ever rented an apartment: rent is expensive! And that money goes straight to the top lines of REITs, bolstering RWR’s share price.

But we CEF investors know we can do better than RWR, with its ho-hum 3.9% yield. Instead, we prefer a CEF like the 8.3%-yielding Cohen & Steers Quality Income Realty Fund (RQI). That yield, of course, is more than double that of RWR, and RQI has been delivering that higher income stream for decades.

And since RQI’s inception, it’s outperformed RWR on a total-return basis, too.

This is thanks to RQI’s active management and careful selection of high-quality REITs, such as cell-tower “landlord” American Tower (AMT), warehouse giant Prologis PLD (PLD) and data-center REIT Digital Realty Trust (DLR).

What’s more, RQI is selling at a discount to net asset value (NAV, or the value of the REITs it holds).

That discount is dwindling, as you can see from the chart above, and it’s likely to disappear as investors realize this 8.3%-yielding REIT CEF has beaten both the stock and REIT markets. There’s simply no way a CEF like that should sell for anything less than market value.

Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Steady 10.9% Dividends.”

Disclosure: none

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