by Susan J. Aluise | August 27, 2012 10:00 am
Publicly traded real estate investment trusts (REITs) have a lot of things going for them: They potentially generate growth and income, they boast higher liquidity because they’re bought and sold over an exchange like stocks and they’re required to pay out 90% of their annual earnings to investors.
And so it’s little surprise that REITs have long been considered a great way to diversify your portfolio, generate reliable income and guard against the ravages of inflation — especially given today’s woeful Treasury yields.
But despite the many attractive attributes of this asset class, not all REITs are alike — and the devil is in the details.
REITs typically do one of two things: Invest in real estate that generates income like apartments, shopping malls or industrial parks; or finance those real estate investments. The latter category often is referred to as a mortgage REIT or mREIT.
Some of today’s best property-based REITs are focused on hot niches like multifamily rental properties or senior housing — sectors that should show strong growth in the near future because of declining home ownership trends and a graying population.
But when advisors regale investors with tales of double-digit dividend yields in this space, they’re usually talking about mREITs. Mortgage REITs own debt instead of property.
Because mortgage interest rates are so low now, mREITs are generating wide net interest spreads that they are passing on to investors as dividends. Some of these mREITs have current dividend yields in the 13-14% range. And with more investors chasing yield these days, share prices are on the rise too.
Great deal, right? Yes, but more leverage equals more risk — if those net interest spreads narrow quickly, investors are likely to get a rude awakening. And mREITs have been famous in the past for unreliable payouts and other factors, as InvestorPlace Editor Jeff Reeves writes here.
With REITs, as with any other asset class, it’s necessary to be diligent in researching all your options and make sure your choice blends well with your overall investment objectives, time horizon and risk tolerance.
That being said, here are three tempting, high-yielding REITs:
Essex Property Trust (NYSE:ESS) is a traditional, property-focused REIT invests in one of the hottest sectors around: multifamily rental property. This West Coast-based REIT is cashing in on rising rents in premium locales like San Francisco and Seattle.
ESS is a little pricey, trading around $152. It has a one-year return of about 13%, though, along with a current dividend yield of 2.9% — not flashy, but definitely reliable. ESS has paid its dividend consistently for the past 18 years.
Senior Housing Properties Trust (NYSE:SNH) is an interesting variation on a theme because it invests in independent living and other senior housing properties — a growing opportunity as Baby Boomers age. It also is a so-called “Triple-Net” REIT, meaning that unlike most rental or retail REITs, tenants pay other costs — like maintenance, insurance and taxes — in addition to rent.
SNH has a market cap of around $3.8 billion and is trading around $21.75. It’s one-year return’s a bit smaller than that of ESS at 4.8%, but it’s current dividend yield is larger at 7%. And it sure doesn’t hurt that SNH has increased dividends for 10 years in a row.
If you’re looking for a high-flying residential mortgage REIT, Annaly Capital Management (NYSE:NLY) is a pretty good choice because it borrows at low rates and invests in Government-Sponsored Entity Mortgage Backed Securities (GSE-MBS). MREITs like NLY were built to thrive when borrowing is cheap and interest rate spreads are wide. At least for now, the Fed seems predisposed toward keeping interest rates very low. The biggest risk in the near term likely will be borrower refinancing.
NLY is the biggest of the three, with a market cap over $16 billion, but is also the cheapest, trading around $17. It has a one-year return of 9% and a current dividend yield of nearly 13%.
Although it has grown its dividend by 20% over the past five years, its business model recently has struggled. I think NLY will face challenges, but I believe it should manage to sustain a dividend yield of 9-to-10% over the next two years — not too shabby.
As of this writing, Susan J. Aluise did not hold a position in any of the investments named here.
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