Double-Digit Returns From These Undiscovered Stocks

Most of the time when you're looking for stocks to add to your portfolio, ideally you'd like to earn at least double-digit returns. 

That kind of a return is not easy to find, especially if you want a degree of safety. This is something every investor struggles with, and it's something I keep in mind in every issue of my premium advisory, Five-Star Stocks. 

At times, I need to be a bit of an opportunist. Often, that involves weeding through troves of historical data to see where today's best opportunities -- and five-star stocks -- may lie.

And right now, a window of opportunity is opening for a certain under-the-radar, income investment vehicle -- a market phenom that I've seen take off, time and again, when investors become wary and the market becomes volatile.

In short, I believe history is bound to repeat itself.

You may remember the tech boom of the late 1990s, which ultimately led to the tech bust. In 2000 alone, the Dow lost 7% and the S&P 500 lost nearly 13%.

That year, investors bailed out of speculative stocks, looking for something more stable. The investments I'm going to tell you about in a moment were the beneficiaries of that migration. 

As a group they gained 26% in 2000. That year, I added one of these investments to my portfolio and saw a total return (including dividends) of 78%.

Then in 2001 and 2002, I put some more money into investments in this group and made gains of over 40% in both of those years. Meanwhile, the S&P 500 dropped 13% in 2001 and shed a whopping 23% of its value in 2002.

And this small group of investments faired very well in 2003, 2004, 2010 and 2012, beating the major indices handily in each year.

Not every year was a smashing success. In 2011 and 2013, they only returned 7% and 3% -- better than T-Bills, but not the kind of returns I'm seeking.

The key to winning with stocks in this sector is anticipating when the industry is ready to rebound, and secondly, knowing how to delve into its variety of subsectors and companies to identify which stocks in the group have the best chance for success.

And right now I believe circumstances are setting up for a handful of these investments to have another huge year in 2014.

I'm talking about investing in real estate. But not in the traditional way...

Many folks play real estate by buying rental properties. Over time -- with the right properties in the right locations -- you can certainly make money.

But investment properties also come with a rash of headaches, like dealing with tenants who don't pay on time, increasing taxes and assessments, leaky roofs, and often, complex tax issues.

However, there are some great ways to invest in real estate with much less money at risk, very good returns, and nobody calling you in the middle of the night to fix a plumbing leak.

The special investments I'm talking about are Real Estate Investment Trusts (REITs). Like mutual funds, REITs allow investors to pool their money together to purchase shares in a larger group of investments -- in this case, real estate or real estate-related investments.

The underlying properties can be office buildings, land, apartment complexes, hotels, shopping centers, warehouses, single family homes and even real estate mortgages.

But there's one even more important reason why REITs have often flourished... they tend to offer outsized dividend yields.

You see, by law REITs have to pay out at least 90% of their taxable income to their shareholders every year in order to avoid paying corporate taxes. That translates into nice yields of 8%, 10%, even up to 14.5% for the REIT investor, making these investment vehicles very attractive.

And recent events may make now one of the best times to get in.

For starters, real estate is in recovery, much like we saw in 2004 before the last housing boom. Prices are improving in the major metropolitan areas, yet year-over-year growth is still well below the peak reached during the last housing boom. That means there's still plenty of room to grow.

To help prove my point, take a look at this graph of home sales (below).

We are definitely in an uptrend, but again still roughly 30% below the 2005 peak with plenty of upside left. 

But what about possible headwinds from interest rate hikes? Since there's no need to rein in economic growth anytime soon, I think we can expect rates to remain steady. In fact, most Fed watchers don't expect interest rates to rise until late 2015 or even early 2016.

That is our window of opportunity.

Investors are just starting to pile back into REITs, and prices are beginning to respond.

Don't worry, investors haven't missed the boat yet. Share prices are still well below where I believe they are going to be in the near future.

There are plenty of choices for investors in this space. And while I don't have enough room to talk about them here, I've recently profiled two "five-star" REITs that I think will soar in coming months in my March issue of Five-Star Stocks. One of these REITs pays a dividend yield of 9.8%, plus the securities it holds are backed by the full faith and credit of the U.S. government. The other REIT has a full 96% of its rental units occupied and pays a robust 14.5% dividend yield right now. (To learn how to subscribe to my newsletter and get this issue immediately, go here.)
As I mentioned earlier, I think the window of opportunity for REITs is now. I've seen setups like this happen before, and if history is any guide, we have a chance to repeat the same kinds of gains that investors experienced the last time around.

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