Stellar performers for the first half of 2013, many real estate investment trusts (REITs) ended the year down as concerns that the Federal Reserve’s QE3 policies would lead to higher interest rates prompted investors to seek out alternatives. But REITs, with their lofty dividend yield, bounced back stronger in January and look like an attractive play in 2014.
Investors have shied away from these investments since last May, when former Fed Chair Ben Bernanke signaled the Fed would “taper” its aggressive bond-buying — a move that would trigger higher interest rates. Interest rates are an important consideration for REITs, because they adversely impact borrowing costs for developers.
But it’s hard to keep a lofty dividend yield down, and REITs bounced back in January — and REITs could see even better performance given new Federal Reserve Chair Janet Yellen’s assertion on Tuesday that low interest rates make sense in the current, still-weak, economy.
Yellen’s remarks indicate that while the Fed is still pursuing a policy of “quantitative easing”, it is unwilling to risk sending the economy into an interest rate shock. That’s good news for REITs, which have long been considered a great way to gain exposure to real estate without all the headaches of being a landlord.
Here are three REIT plays to buy for the dividend yield:
Annaly Capital Management (NLY)
Annaly Capital Management (NLY) is a large mortgage REIT that invests in Government-Sponsored Entity Mortgage Backed Securities (GSE-MBS). NLY and other so-called “agency” mREITs thrive when borrowing is cheap and interest rate spreads are wide. If the Fed does indeed keep interest rates low throughout the year, mREITs like NLY could do very well for investors in 2014.
NLY offers a couple of big advantages for an mREIT: size and price. It boasts a market cap of $10.3 billion, and last year’s selloff has left it trading under $11. It has a one-year return of 9% and a current dividend yield of 11%. NLY is up nearly 9% year-to-date.
For investors chasing dividend yield, today’s low mortgage rates are enabling mREITs to pay out hefty — sometimes even double-digit — dividends. A note of caution, however: mREITs can be riskier than their property-based counterparts if interest rates rise.
American Realty Capital (ARCP)
American Realty Capital (ARCP) is an interesting twist on the traditional property-focused investment — it is a so-called “triple net” REIT — its retail tenants pay real estate taxes, insurance and handle maintenance. That means the REIT’s operating costs are lower and the tenants tend to tilt heavily toward larger, more stable retail chains.
ARCP might be a diamond in the rough for the REIT sector: It is well-managed and has grown dramatically through strategic acquisitions of REIT CapLease in 2013. This month, ARCP closed on its blockbuster $6.85 billion merger with Cole Real Estate (NASDAQ:COLE), creating one of the largest triple-net lease REITs.
Size has its benefits, particularly in economies of scale: ARCP expects to realize about $70 million of combined expense synergies and expense savings by the end of the first year.
ARCP has gained 7% so far in 2014, and the REIT boasts a current dividend yield of 7.1%. This triple-net REIT offers investors a lower risk profile than the typical mREIT play, while still offering up an attractive dividend yield. Trading under $14, ARCP hasn’t fully bounced back from last year’s cliff, so it looks like a cheap buy now.
Vanguard REIT ETF (VNQ)
If you’re an income investor looking to the REIT sector for dividend yield, but seeking added safety in a diversification, an exchange-traded fund (ETF) like the Vanguard REIT ETF (VNQ) might be a great play. In addition to investing in scores of individual REITs, ETFs trade over a major exchange like stocks and have low fees — VNQ has a tiny annual expense ratio of 0.10%, or $10 for every $10,000 invested.
VNQ is massive, with $33.5 billion in assets under management. Its top holdings include Simon Property Group (SPG), Public Storage (PSA), ProLogis (PLD), Equity Residential (EQR) and Ventas (VTR).
Additionally, the REIT includes exposure to high-potential property sectors like healthcare, as well as industrial, retail and residential. VNQ is trading around $69 and is up 7% year to date. It has a current dividend yield of 4%.
As of this writing, Susan J. Aluise did not hold a position in any of the aforementioned securities.