How does a hefty dose of income, the safety of a physical asset and great capital gains potential sound to you?
Well, if you’re an investor in or about to enter retirement, that can be great news. And this is no siren song — real estate investment trusts, or REITs, can deliver all three to a portfolio.
Created by Congress in 1960 to give Americans the opportunity to easily invest in commercial real estate properties, REITs feature the best combination of attributes for retirement investors. REITs trade on the major exchanges just like regular stocks, and in exchange for tax benefits at the corporate level, REITs also kick out some nice dividends.
Today, REITs own a variety of property types — from office buildings and apartments to shopping malls and even computer data centers. Not to mention, the several that own the mortgages tied to these properties. And given how big the sector has gotten over the last few years, navigating the REIT waterways can be tricky.
How exactly should retirement investors go about adding healthcare stocks to a portfolio? We look at a few ways to do it — namely, a stock, an exchange-traded fund (ETF) and a mutual fund to get you started.
REITs for Retirement Investors – Simon Property Group (SPG)
For retirement investors looking for a single REIT to buy, there are plenty of stalwarts in the sector. However, Simon Property Group (SPG) could be king of them all. With a market cap of $53 billion, it’s the largest REIT in existence.
SPG owns, develops and manages real estate properties that consist of malls, premium outlets, mills and community lifestyle centers. Overall, the firm owns more than 228 different shopping properties, representing more than 189 million square feet of retail space. What’s more impressive is this is after SPG spun off some of its lower-tier malls and shopping centers as Washington Prime Group (WPG) back in May. The firm also has an international presence, owning premier outlets in Japan, South Korea, Malaysia, Mexico as well as owning stakes in other European mall operators.
SPG’s size has made it a top performer over the years and has managed to beat the S&P handily since its IPO.
The REIT has also continually seen rising cash flows stemming from it operations — with the latest quarter showing a 12.8% increase in funds from operations. Those cash flow increases have come back to investors by way of hefty dividends. Even with its immense size and steady gains over the years, SPG still yields 3.1%.
For those retirement investors looking to add a single REIT, you can’t go wrong with SPG.
REITs for Retirement Investors – Vanguard REIT Index ETF (VNQ)
When it comes to REIT ETFs, the Vanguard REIT Index ETF (VNQ) is the behemoth in the sector. At $44 billion in assets, VNQ is the largest fund and one of the most heavily traded. It’s also one of the broadest in terms of portfolio holdings.
VNQ tracks the MSCI US REIT Index, which includes all physical property types, but kicks out mortgage and hybrid REITs from its portfolio. Today, the ETF tracks 138 different real estate firms, including the previously mentioned Simon, as well as industry stalwarts like Boston Properties (BXP) and Prologis (PLD). That breath of holdings gives retirement investors great access to the sector and helps VNQ produce a juicy and Treasury-beating 3.8% dividend yield.
But VNQ isn’t just a one-trick income-producing pony. Its total returns have been great as well.
Since its inception in 2004, VNQ has managed to return 9.36% annually. That’s enough to turn $100,000 into nearly $236,000 over the last ten years. Add in Vanguard’s low expense ratio of 0.10%, or $1 per $1,000 invested, and you have a great, diversified core income holding for your retirement portfolio.
REITs for Retirement Investors – Voya Global Real Estate Mutual Fund (IGLAX)
For those retirement investors looking for an actively managed for their REITs, the Voya Global Real Estate A (IGLAX) mutual fund is a great choice.
IGLAX is different than the previous two choices in that yield isn’t the play here. Instead, it’s just quality of management and returns, as well as geographic diversification.
The Morningstar bronze-rated fund has been guided by managers T. Ritson Ferguson & Steven D. Burton since its inception and the two have done a good job of navigating the sector over the last few market cycles, ultimately driving the $5.2 billion fund to market-beating performance.
Helping drive that performance is the fact that IGLAX is a global REIT fund. About 52% of the funds holdings are real estate and property management firms located outside the U.S. REITs are a global phenomenon — with nations from Singapore to Japan adopting the tax-structure.
Expenses for the fund are 1.24% — high, but lower than your average REIT fund. There’s also a maximum 5.75% sales load, though Voya does offer other share classes with lower sales loads and reduced expense ratios, depending on your account type and units purchased.
As of this writing, Aaron Levitt is long VNQ.