Subject: Re: REITs, 1970s/80s, stagflation
> "the problem with income trusts is that they are required to pay out the lion's share of all their earnings"

Whether that's a problem, a blessing, or a non-issue, depends on the life you've lived, where you live, all kind of things.

For me, it's currently not a problem, it's a benefit.

Though, if I had moved to some other nearby countries, then high ROE and no dividend could be more beneficial.

Tax, and trustworthy re-use of capital by companies that reinvest gains, has a huge impact. Price does too.

If BRK halved suddenly, and if the US wasn't the way it currently is, I'd buy BRK in a flash, and forget REITs.

Many of the 'problems' I've encountered investing in the past 20+ years involved companies with success in their core business, generating beautiful returns, gradually thinking they could be successful in any niche, moving into vanity projects, pushing far too far, too fast, often not communicating that the underlying business model is changing to something much more risky (e.g. banks, MBS/CDO), doing buyouts of other companies at big premiums, CEO pay increases etc.

Or my personal pet peeve - optimising for ROE by shrinking equity, by throwing away all those lovely profits doing buybacks at sky-high prices, and most often, buying back when the share is most richly valued, sometimes to counterbalance all the stock issued as generous equity grants to employees and CEO.

Very few companies are like Berkshire when it comes to well timed buybacks.

My ideal situation is a company that sits in a very profitable niche, growing organically/with inflation, paying the 'rent' on the niche to me.

They have a core business clear in mind, they can focus on optimising how well they do it.

Providing the returns I'm getting from a company are similar to the broad index, but without so much volatility for example, or perhaps with better performance in certain points of the economic cycle, such as stagflation (the topic of this thread), or with greater tax efficiency... why care?

Also, anyone reducing the issue of REITS down to one single attribute (they pay out earnings each year) would be taking an unreasonably narrow view of an interesting sector, that is qualitatively different to other sectors, and is filled with very unusual and diverse opportunities.

For example, the sector as a whole, performs differently during stagflation to other kinds of stock. See my other post.

Depending on your views on economics, Trump, war, oil, etc, you may have a much more serious concern in mind than the trivial issue of whether you 'sell capital to get needed income' or 'reinvest unneeded dividends to restore capital'.

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> "the core business is being milked rather than expanded"

If something offers me a boring 11-13% CAGR, or 10% but with less volatility / more of a safety net than the general market, why care that it does it by paying dividends?

Not all niches can be grown forever. There are family businesses that have prospered for hundreds of years by comfortably sitting in a niche.

Further, certain niches are *only* available to explore if you are willing to look at high dividend payers.

There are so few 'wonderful' opportunities out there, with the US market at CAPE 40 ish lately.

Why avoid whole categories of potential opportunity simply because they pay out income promptly rather than reinvesting it on your behalf?

That doesn't make sense to me.

I think it's better to keep my eyes fully open to both worlds - both companies that reinvest earnings, and companies who pay them out.

Who cares as long as it's good, safe and cheap.

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> "Almost invariably, the absolute best firms can deploy giant amounts of new capital into their business"

I generally don't want to buy the 'absolute best' businesses.

They're usually priced far too high relative to how great they are. Everyone is looking at them.

They're also usually in the US, which I don't want to invest in any more.

(I stand with Canada on boycotting, even though I'm not Canadian).

And worst of all, if they stop being great, even for a moment, your account gets shredded.

I would rather seek dull '2nd highest and 3rd highest decile' businesses.

Few people compete for 2nd or 3rd place in the olympics. But in investing it often pays perfectly well.

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> "Admittedly, for some people there is a material difference in tax rates between dividends and capital gains, but (a) it's not usually that large"

For a UK investor with UK REITS in a UK savings wrapper (SIPPs, ISAs, LT ISAs, or simply low income), it's a 40% gap vs a US stock or ADR, on dividends.

Personally, I feel 40% is quite a lot.

It can be even higher for e.g. Euro dividend stocks vs REITs for a UK investor.

For example, in practice 53% tax versus the company pre-tax income, by the time you get the dividend in your bank account from French high quality dividend stocks (e.g. Total/Sanofi), because reclaiming the withholding tax from France is awful in practice.

I feel 53% is definitely quite a lot.

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> "I believe that there is a huge population of investors who are myopically investing for income over long periods who would do VERY much better if they instead invested in the very best companies they could identify, without regard to dividends"

I don't know if you're addressing that comment at some/all REIT investors? It kind of comes across that way, but it maybe wasn't your intent.

Might it not be a little unkind to call people 'myopic' on a forum dedicated to a type of income investing?

Simply because they have different goals or experiences or emotions or taxes etc that shape what they want from an investment?

I mean by all means, think negative thoughts about how others invest if you want to, but coming here to say it seems a little bit harsh.

Particularly when

- they maybe just have different preferences about the emotional side of investing (tick, tock, here comes a divi, why bother to check the price or sell?)

- they have very different tax situations to yourself

- they *enjoy* REIT investing more than other styles of investing (I fall into this category oddly, it's the most investing fun I've had in ages!)

- they may hold strong views about the prospective returns of REIT stocks or of sectors that are classically dividend payers (e.g. oil, miners), according to the stage of business/economic cycle (see my other post) - perhaps REITs serve as a convenient proxy for investing according to those strong views.

- they may have particular insight into the REIT, oil, or whatever sector from past investing, or from a career in that sector - it may be their investing edge.

This is a board for people who *want* to do the opposite of what you're describing, who generally want income.

And this is a thread about stagflationary economies.

If someone held some of their assets as cash in the bank, or in bonds, or bought an annuity, for income, would you call them myopic?

There is no One True Path in investing.

Some types of investing require tax setups I don't have, knowledge or skill I don't have, emotional responses to loss or gain or past experience, I might not have.

I think it's important to take plenty of time to understand other people's needs, wants, goals, taxes, financial situation, any edge they have, emotional response to issues in investing, etc., before we say to them what they really should be investing in, or label them or perceive them as 'myopic'.

Because you cannot prescribe good solutions to a person without first learning who they are, exactly what situation they're in, and what problem they are trying to solve.

Ultimately, we should use money to make ourselves happy. If investing in income-paying stocks is all it takes to bring a big smile to someone's face, we should celebrate that with them, because there are thousands of far more destructive, wasteful and truly myopic ways to use money.

Spending money on a stock that works 'in a way that makes you happy' is no different from buying a wine you prefer or travelling to a holiday location you particularly like. People have preferences, biases, emotions, as well as their personal situations, and that's OK. It isn't myopic to know yourself and what makes you happy.

It's best not to 'yuck' other people's 'yums' if they tell you they're happy about what they're doing.

Many people *consciously* optimise investments for a quiet boring life, good sleep, or to live in a way that brings pleasure in itself. Not only for peak theoretical profit opportunity. An example might be, boycotting US stocks, because of the feelings they would create in relation to ethics etc.

Here's the most famous example of this idea:

- "Do you know the only thing that gives me pleasure? It's to see my dividends coming in" - John D Rockefeller.

TRS