[slg]

The thing about retirement, especially early retirement, is it (hopefully) lasts a long time. It is foolish to assume that the trends of the last couple of years will continue on indefinitely rather than return to historic norms. Banking on a 7%-8% return on low risk assets is just asking for trouble.

[adam_arthur]

You seem to misunderstand.

If a company owns apartment buildings and earns $1B a year, and pays out $500m a year in dividends at 5% yield, that is a 50% payout ratio and very safe margin of error on cashflow for real estate.

If you buy today and hold, that's locked in. You are in a safe position, if you assume that rents aren't going to decline nationally and materially. There is no "good times and bad times" you're in the position and in the game. Just hold it

If you buy Costco today at a 45x earnings multiple and 0.5% dividend, and expect to be able to sell it down at 4% a year and earn a better yield at lower risk, that is quite clearly poorly conceived in my opinion.

(among many other large caps in a similar position)

[slg]

Do you have an example of an REIT that fits your hypothetical that has a history of delivering these yields consistently for decades?

[adam_arthur]

O (Realty Income) pays 6% today, AFFO multiple of 12x, low debt (35% debt to asset value), low payout ratio (75% of AFFO), and has never cut their dividend, including during the GFC

And I think this is one of the poorer income choices today.

People would rather buy Costco at 50x earnings multiple and try to sell the principle down at 4%/year, apparently!

The responses to this thread are really eye opening to why such a large small/large cap valuation gap exists. (Yes, O is large cap, but smaller REITs have even better numbers)

[jandrewrogers]

Realty Income is higher risk and lower return net of taxes right now than e.g. some US treasury tracking ETFs. As an example, the effective yield on BOXX is only 0.25% lower than O, and can be recognized as long-term capital gains.

For a company like Costco with high revenue growth and a very low price/sales ratio, earnings are a fairly meaningless number for valuing the company and experienced investors know this. You have to finance growth with earnings and if they stopped investing in growth it would boost earnings at the new (higher) equilibrium. Investors take the long view.

[adam_arthur]

I'm a fan of bonds too, though think yields will go a bit higher from here.

A 12x AFFO multiple is not lower return than a 5% yielding (20x multiple) US treasury bond though. The treasury bond coupon is safer, but more exposed to inflation risks.

I'm not sure what BOXX is, but a quick look showed they hold options against SPY, so sounds like an options selling strategy for income. These work alright too, though your income will grow/decline along with the price of the underlying.

And you should check again revenue growth for COST or a stock like AAPL, which is projected to have -5% revenue growth over the year.

A 50x earnings multiple implies 2% yield today. Even if Costco doubles their revenue, at the same margins their earnings yield would only be 4%. So say they grow it 3x, they now have an earnings yield of 6%.

So in 15-20 years when they've 3x their revenue, you're entitled to a 6% yield on your original investment at 100% payout ratio.

To be a remotely good investment on a fundamental basis, they must either carry a lower multiple, or expand their margins over time. Given that Costco's whole premise is being a discount retailer, expanding margins is unlikely.

Please don't participate in an investing conversation if you don't have anything data driven to contribute.

[slg]

You pretty quickly when from "yielding 8% on distributions alone" and "REITs that often yield 7%" to "pays 6% today". There are plenty of windows in which an investment in O wouldn't have met your original criteria.

[adam_arthur]

I gave a widely known larger cap name.

We are discussing a proposed strategy of selling 3-4% of principle as your "income". 6% is clearly far higher, and in this case safer too (imo), which was my original point

CTO pays 8.8% with similar setup, higher payout ratio and debt, but below market rents across the portfolio, and well situated in the Sunbelt. As one smaller cap example

[slg]

And I can get 4-5% by just holding cash in a high yield savings account right now. The point of the 4% rule is that is has remained true over large scales of time in which a lot changes. Compare that to your CTO example, and that 9.5% yield hasn't exactly been consistent.

https://www.nasdaq.com/market-activity/stocks/cto/dividend-h...