When I looked at which sectors have performed well lately and which haven't, it seemed counterintuitive that U.S. Real Estate Investment Trusts (REITs) racked up a very strong performance in July and August, after two disappointing months in May and June.
These days, investors are suffering through the vicissitudes of a volatile stock market. At the same time, yields on CDs and bonds are extremely low, thanks to historically low interest rates.
But REITs are an attractive alternative to fixed-income investments. They offer both higher average yields and considerably higher appreciation potential.
To be sure, there's been bad news lately about the economy in general and the housing sector in particular. But even though the long-term outlook for real estate companies is mixed, REITs have largely met analyst expectations. Moreover, while U.S. economic growth is dicey right now, there's still positive absolute data on gross domestic product and corporate earnings. The upshot: Today REITs seem like the right play, at the right time.
Benefits of REITs
As investors flee the stock market, more money is flowing into bonds and other fixed-income instruments. As I wrote in a previous article, 3 Most Deadly Misconceptions About Bonds, fearful investors withdrew a whopping $33.1 billion from domestic stock mutual funds during the first seven months of this year and put the money into bond funds. But since it's not a good idea to put too many of your eggs into one basket, you should consider REITs to balance out your portfolio during these turbulent times.
REITs are a superb diversification tool. They put the investor in the position of being a de facto commercial landlord, without any of the burdens involved with actually leasing property.
Commercial real estate is a huge part of the U.S. economy and REITs give you exposure to this vital sector.REITs adding REITs to your holdings, you are adding yet another type of diversification while simultaneously owning a typically well-performing investment class. In this era of extremely low interest rates, you should consider supplementing your portfolio's bond component with equity REITs.
REITs, REITs are an oft-misunderstood investment class, and you should first know the basics of how they work.
How REITs Work
The term 'Real Estate Investment Trust' refers to companies investing in the ownership of commercial property held REITs. REITs are listed on exchanges and traded just like any other stock. They come in many forms, but in this article I'm referring to equity REITs that invest in Commercial real estate.
An equity REIT's primary goal is maximizing net rental income from owning and operating commercial real estate. Essentially, the REIT operates as the landlord. REITs own industrial parks, office buildings, apartment complexes, shopping centers, shopping malls, hotels, and self-storage facilities. They're easy to buy and sell -- and they're easy to own. They employ large staffs to take care of the daily hassles of property ownership; that never even remotely becomes your concern.
Take note: REITs don't pay federal income tax. To earn its categorization as a REIT, the real estate company agrees to pay out at least 90% of the net accounting income in the form of a shareholder dividend. Only by doing this can a real estate company obtain the coveted label of 'REIT' and consequently avoid being taxed at the corporate level. That's why REITs are among the highest -paying dividend stocks of any class of stock.
The Fab Five REITs to Consider Today
Below is a snapshot of five attractive REITs that are historically strong performers and particularly well poised for continued prosperity. Start here if you want to find potential candidates for your portfolio:
- Cogdell Spencer (NYSE: CSA) serves as a play on the booming, $2 trillion-a-year healthcare industry, because it operates medical offices, diagnostic centers, and other outpatient facilities in high-traffic areas. Cogdell Spencer's portfolio now comprises 62 wholly-owned properties and consolidated joint ventures, three unconsolidated joint venture properties and 52 managed medical office buildings.
- Equity One (NYSE: EQY) operates quality strip malls and shopping centers. Equity One's 179 properties largely consist of the most economically durable shopping centers -- i.e., those anchored by supermarkets, drug stores, or discount retail store chains. This REIT is in the best position to benefit when the economy finally emerges from its funk and consumers start spending again.
- Public Storage (NYSE: PSA) owns those ubiquitous, bright orange self-storage warehouses. As the numbers of Americans selling their homes and storing their belongings skyrockets, Public Storage is the best way to leverage this trend. This REIT has an ownership interest in 2,010 U.S.-based self-storage facilities and 160 European storage facilities. The company racked up 2009 revenue of $1.73 billion, making it bigger than its next four competitors combined.
- Realty Income (NYSE: O) holds over 2,300 properties owned under long-term lease agreements with regional and national retail chains and other commercial enterprises. Realty Income, one of the largest and best-managed REITs, has declared 482 consecutive common stock monthly dividends throughout its 41-year operating history and increased the dividend 58 times since it was listed on the NYSE in 1994.
- Weingarten Realty Investors (NYSE: WRI) develops shopping centers, primarily in the South and Southwest, which it subsequently leases to commercial tenants. It now owns or operates 389 properties, totaling 65 million square feet of land. In an effort to diversify its revenues, the company has been wisely sloughing off poorly performing and non-core properties and purchasing higher potential properties in California and on the East Coast.
P.S. To see another REIT currently offering a juicy yield, check out Andy Obermueller's article, Forget Treasuries -- Buy This 12% Yield Instead.
