Stocks to invest in – This 9% Yield Real Estate CEF Is Attractive

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Source: Nuveen

Sources of Income:

Considering the fund holds primarily real estate securities (mostly REITs), you may be wondering how it is able to pay out a 9.2% distribution yield when REITs yield, on average, only 4.1% as measured by the Real Estate Sector ETF (XLRE). The answer is a combination of dividends/income, capital gains, leverage, and in rare cases a return of capital. Specifically, the 9.2% yield is reasonable if we assume REITs will deliver a long-term total return (dividends plus price appreciation) of 7.3% (this is the 2017, 10 to 15 year estimate, provided by JP Morgan).

More specifically, if this 7.3% return is levered by 1.3x (the fund’s leverage ratio) then the gains available for distribution actually exceed the 9.2% payout (1.3x is a conservative leverage ratio, and is limited by regulation from going much higher). Further, considering the fund trades at a discount to NAV, and considering publicly traded real estate is an attractive contrarian play right now, we’re comfortable that the fund can comfortably maintain this healthy 9.2% payout ratio.

And for reference, this table from Nuveen shows the recent breakdown of distribution income sources.


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