REIT Dividends Could Suffer from Debt Downgrade

All the news focus right now is on the possibility that the U.S. debt ceiling will not be raised, and that the U.S. could begin defaulting on its debt. This news has many investors worried, and looking for good dividend investing choices, just in case everything goes south.

Interestingly, some of the biggest losers from debt default, and the resulting credit rating downgrade, would be real estate investment trusts (REITs). It is very likely that REITs would suffer — and so would their dividends. This is because a credit downgrade would make U.S. Treasury debt more expensive. A downgrade represents an increase in risk. Without the sterling rating that U.S. Treasuries have enjoyed for decades, investors would demand higher yields on the bonds. Additionally, the paper held by REIT portfolios made up of debt insured by government agencies (Fannie, Freddie), would also suffer the same sort of downgrade.

Mortgage rates and other interest rates related to real estate are closely tied to the rates on Treasury notes (especially long term Treasuries). As the yield rises on Treasury notes, other interest rates rise as well, making it harder to borrow money. In some cases, this is vital when it comes to the ability to own real estate and find holdings for REITs. With REITs suffering, dividend payouts might be cut.

In the end, a possible debt default in the U.S. would have far-reaching consequences. It doesn’t seem as though politicians are able to find common ground as it relates to taxes, spending cuts and other conditions for raising the debt ceiling. As a result, it is a very real possibility that a deal may not be reached. It might be time to re-examine your portfolio, and make changes to the way you are doing things. It might be time to position yourself to take advantage of opportunities that can crop up during times of economic upheaval.