After being left for dead in the second half of 2013, real estate investment trusts (REITs) have surged by more than 10% in the first four months of this year — not too shabby considering that the S&P 500 only inched up 1.5%.
REITs are a great way for the individual investor to add real estate exposure to their portfolio without all the hassles that come along with being a landlord. Because of the specific federal rules under which they are organized, REITs offer big advantages for income investors. REITs are required to pay out 90% of their annual earnings to investors and they are exempt from federal corporate taxes, meaning that dividends are taxed as ordinary income. Steady and predictable rent payments also are an attractive quality because cash flow tends to be more stable than is often the case with other types of investments.
While investors have chased the stellar returns of mortgage REITs (mREITs), which invest in mortgages rather than real property, the near-certainty that short-term interest rates will rise this year will weigh on big mREITs like Annaly Capital Management (NLY). Popular commercial property REITs like Equity Residential (EQR) and AvalonBay Communities (AVB) are trading near five-year highs now, so I’d prefer to wait for a pullback before buying.
Still, investors looking for winners in this year’s REIT rebound might find greater opportunity on the road less traveled: specialty or niche REITs. Fortunately, there are some good REIT opportunities to be found in strange places. Here are 3 odd, high-yielding REITs to play the real estate rebound: