Have Income Stocks Stopped Reacting To Rising Bond Yields?

There is no precise or fool-proof way to know that a stock has bottomed out after a large decline. Successful timing is often more of an art than a science. All the same, there are certain signs you can look for. And in my view, one of the most useful signs is the way a stock reacts to bad news. If a stock stops reacting to bad news, then chances are good that the selling is exhausted. The less-committed holders have already sold out.

This is where I see triple-net REITs today. Triple-net REITs are some of the most conservative and stable dividend payers you can find, which is why they became bond substitutes for millions of investors desperate for yield. So, when bond yields started to rise in May, this sector got hit a lot harder than most. Prices on some of the most popular triple-net REITs fell by as much as 20-30% from their 2013 highs…at a time when the broader market held up relatively well.

Take a look at the chart above, which includes four of the most popular triple net REITs. Over the last five trading days, at a time when the 10-year Treasury has yield has continued to push higher—and now yields a few basis points away from 3%–Realty Income (O), Cole Properties (COLE) and American Realty Capital Properties (ARCP) are all flat. National Retail Properties (NNN) is down slightly, but again, it has reacted far less dramatically than recent weeks.

Does this mean that the bottom is in? Maybe, maybe not. Markets are fickle, and there are no guarantees that investors won’t find a new reason to dump these. Prices are attractive, however, and in my view it makes sense to start aggressively buying. Each of these REITs pays a dividend in the 5-7% range and I expect all to aggressively raise their dividends in the years to come.

Disclosures: Sizemore Capital is long O, NNN, ARCP, COLE.