For investors about to enter, or already in retirement, real estate investment trusts (REITs) have to be on your list. 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 big dividends (often in the 4%-6% range).
That high dividend, plus REITs’ capital appreciation, has made the owners of office buildings, apartments, shopping malls and other properties tremendous performers over their history. REITs have managed to return an average of 12% per year since 2000. That blows every other asset class out of the water.
A chance for high income and capital appreciation, as well as owning a physically-backed inflation resistant asset — what’s not for a retirement investor to like?
But, where do you begin and how exactly should retirement investors go about adding REITs to a portfolio? At InvestorPlace, we have you covered. Here’s one stock, one exchange traded fund (ETF) and one mutual fund to get you started.
REITs for Retirement (Stock): Welltower Inc (HCN)
Some of the best REITs for retirement investors are those that will benefit from retirees themselves, and Welltower Inc (NYSE:HCN) is the king of them all.
HCN is one of the largest owners of healthcare-related properties. The company owns the hospitals, doctors’ offices and senior living facilities that are seeing rising demand from the “Greying of America.” Welltower’s portfolio spans more than 1,500 different properties.
The real win for HCN and its investors is that the company merely owns the buildings. It doesn’t run the doctor’s office or senior living facility. There’s no insurance or Medicare reimbursement to deal with. HCN just collects a rent check. And, given the highly specialized nature of its buildings, those rent checks are quite large and rental agreements are written for several years.
What that means for HCN is that it has continued to see rising funds-from-operations (FFO) over its history. FFO is the key metric — basically cash flows — that drive dividend growth. In Welltower’s case, it has managed to increase its payout by 5.8% annually since 1971. That’s exactly the kind of growth retirement investors are looking for.
When it comes to REITS, HCN and its 4.95% dividend make an ideal selection for investors.
REITs for Retirement (ETF): iShares Cohen & Steers REIT ETF (ICF)
For those investors in retirement, there simply isn’t enough time to recover from big losses. As result, many investors will flock to the largest companies in any given sector, as their profits, cash balances, etc. provide some cushion in downturns.
When it comes to REITs, the logic is the same, which is why the iShares Cohen & Steers REIT ETF (NYSEARCA:ICF) could be a great bet.
ICF’s underlying index — the Cohen & Steers Realty Majors Index — focuses its attention on those REITs that are considered “premier” property owners. Essentially, these are the companies that dominate their respective property types. The fund is rather concentrated at just 30 holdings, but you’re getting the top apartment, mall and office building owners. In reality, you may not need a ton of other REITs.
That focus on the largest REITs hasn’t hurt ICF in the returns department. Since the ETFs inception in 2001, ICF has managed to produce an annual total return of nearly 11%. That’s not too shabby. What’s even better is that the fund has managed to return that with less volatility than some of its broader rivals.
Expenses for ICF run at just 0.35%, or $35 per $10,000 invested.
REITs for Retirement (Mutual Fund): Baron Real Estate Retail (BREFX)
For retirees looking for a more active take on REITs and commercial real estate investing, then the Baron Real Estate Fund Retail Shares (MUTF:BREFX) mutual fund could be a great pick.
BREFX’s manager, Jeffrey Kolitch, takes a very broad approach to real estate investing and doesn’t just focus on REITs. He includes everything from real estate brokerage firms and home builders/construction companies to furnishings providers and home-focused retailers. If it’s somehow related to real estate, Kolitch will consider it for the fund’s holdings.
BREFX is basically evenly split between REITs and these other real estate-related items. Top holdings include flooring/carpet firm Mohawk Industries, Inc. (NYSE:MHK) and real estate services company CBRE Group Inc (NYSE:CBG).
The broadness of BREFX’s holdings and focus hasn’t hurt its returns. Kolitch generally hones in on “growth” and does included many smaller stocks in its mix. Since BREFX’s inception in 2009, it has produced and annual return of more than 14%, and that’s after the mutual fund’s 1.31% expense ratio.
The minimum investment for BREFX is $2,000.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.