So, You Want Dividend Income? Be Careful What You Ask For.

I made this rookie mistake. Do not do what I did.

Photo by Mathieu Stern on Unsplash

I bought Ares Commercial Real Estate Corporation (ticker: ACRE) in 2022 at $13.45 a share. It has since sunk to $6.45 a share, losing over 50% of its original value.

Why?

What did I learn?

What mistakes did I make and how can you avoid this?

Before we deep-dive, what is a REIT?

REITs are real estate investment trusts. They basically own and in most cases operate income producing real estate. This includes commercial real estate, hospitals, shopping malls, residential properties, warehouses etc. Anyone that is paying rental income and who owns businesses in these properties make up the income stream for REITS. Investors make good money when there is a steady and reliable income stream and when the REIT has a good management team that is not over-exposed to the wrong property type. REITs can make fantastic investments since they are required to pay out most of their income.

Why did I invest in ACRE?

I was on the hunt for a steady income stream. However, if you are a dividend investor, sustainable dividend investing is the way to go. What does this mean and how can one identify sustainable companies?

1. Firstly, make sure you understand the business well and how it makes its revenue.
2. Ensure that the company has not had a history of cutting back dividends in the past
3. Lastly, check its financials to make sure that it is not crazily leveraged.

These were my mistakes.

I did not do my research on ACRE. I bought ACRE purely for the hefty dividend payout. ACRE has a 15.24% dividend yield which is fantastic. But it is bait. And I fell for it. I invested $5000 in 2022, sold it at around $3500 and then re-bought it again for close to around the same sum. I have made about $500 in dividends in the 9 months that I have held it and even that does not cover my losses.

I should have spent more time investigating the commercial real estate sector. ACRE would have been a fantastic play pre-COVID. But post COVID commercial real estate has not been a good market to invest in. About 38% of ACRE’s portfolio is made up of office properties. With hybrid and remote work taking up the average American worker’s life, it makes sense why ACRE has that mouth-watering 15% yield. The weak commercial real estate market has lent power to tenants to keep rentals down and gives them more leverage on rent renewal dates. This goes hand in hand with higher interest rates in the last couple of years, which have killed ACRE’s ability to refinance/expand their property acquisitions. All of this brings me to my next learning point.

Set up price/market/news alerts on anything that affects your holding. You don’t have to do this so diligently if you’re holding a set-it-and-forget-it well established corporate like Coca-Cola or Johnson and Johnson, but if you’re holding a 15.25% yielding REIT, you better have every alert imaginable set up on your REIT.

Secondly, understand the metrics that will affect your REIT. ACRE has an overwhelming exposure to office space. The metrics that would affect this are

1. Interest rates
2. Foreclosure rates
3. Dividend coverage ratio (this measures how much a company can cover its dividends. Typically, you want a ratio above 2).
4. Commercial real estate market and news pertaining to this.

You can also include other interesting metrics like, how many hedge funds have bought/sold this. Tipranks provides this as a metric.

It requires a special type of vulnerability to discuss your investing mistakes on a public platform but it is vital. What will I do with my ACRE holdings? Most likely sell rather than wait and hope for a miracle.