REITs for Retirement — 1 Stock, 1 ETF, 1 Mutual Fund

reits - REITs for Retirement — 1 Stock, 1 ETF, 1 Mutual Fund

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For those investors about to step into retirement, real estate investment trusts (REITs) could be their best friends. REITs offer retirement investors plenty of benefits. That includes high-dividend income, inflation protection and very competitive long-term returns. It’s the stuff retirement dreams are made of.

The how and why REITs can offer these benefits comes down to what they are made of.

Thanks to a 1960’s act of Congress, REITs are designed to own physical properties — from apartment buildings to shopping malls. The added beauty is that thanks to a bit of tax magic, REITs must distribute 90% of their taxable income as dividends. The result is that the sector has some of the juiciest dividend yields around — often in the 4%-to-7% range.

What makes REITs unique is that they also offer inflation protection and high overall returns. Often rents charged by REITs will outpace rises in interest rates, and since they must kick back much of their income as dividends, their payouts have historically increased by more as well. There’s the hefty dose of inflation protection.

But they aren’t done yet. The combination of dividends and dividend increases has helped them become major total-return elements for a portfolio. REITs have managed to return an average of 12% per year since 2000. That blows every other asset class out of the water.

For retirement investors, the choice is clear — you need to have a dose of REITs. Here’s one stock, one exchange-traded fund and one mutual fund to add the asset class.

REITs for Retirement: Realty Income (O)

Realty Income NYSE:ODividend Yield: 4.1%

For retirement investors, if you are going to go the individual stock route for REITs, you want one that has stood the test of time. How about 557 consecutive monthly dividends? Well, that’s just what REIT stalwart Realty Income Corp (NYSE:O) has paid out since it was founded in 1969. Perhaps more importantly, it has raised that payout at least once in the last 77 quarters straight.

Driving that dividend prowess is O stock’s extensive portfolio of freestanding real estate. The firm owns and operates more than 4,700 properties. These properties include everything from convenience stores and restaurants to movie theaters and automotive parts & services centers. That size and scope provide plenty of diversification benefits for O.

What’s even better is that this property is all triple-net leased. That means that tenants — not Realty Income — pay the taxes, maintenance and other fees associated with renting the property. It’s the holy grail of being a landlord and produces better margins. In the end, it allows O to distribute more cash to investors.

Currently, it yields 4.1%

Given its history of rising payouts and a strong portfolio of properties, retirement investors looking at adding a dose of REITs should consider adding the stock to their portfolios for the long haul.

REITs for Retirement: iShares Core U.S. REIT ETF (USRT)

REITs for Retirement: iShares Core U.S. REIT ETF (USRT)Trailing-12-Month Yield: 4%

For those retirement investors looking for an indexed solution to adding REITs to their portfolios, the iShares FTSE NAREIT Real Est 50 Ind(ETF) (NYSEARCA:USRT) could be an excellent choice. USRT is a recent revamp/relaunch from iShares that involved taking a senior real estate ETF and giving it a new name and new ticker. For investors, this was win-win.

USRT is now part of iShares’ low-cost core lineup of funds. Expenses for the ETF have been dropped to a rock-bottom 0.08%. For that low cost, investors now get access to an even broader index — the FTSE NAREIT Equity REITs Index.

What USRT entails is owning more than 150 different large- and mid-cap REITs. This extensive coverage includes exposure to industry stalwarts like Simon Property Group Inc (NYSE:SPG) and Boston Properties, Inc. (NYSE:BXP). It also hits all the main property types — apartment buildings, medical, offices, retail, etc. All within one ticker.

Since USRT has changed indexes and is “new,” its returns data is a little off. But its new index is the same one in the opening slide that returned 12% a year, on average, since 2000. Given its low costs, USRT should stick close to that average.

In the end, this ETF is one of the best ways for retirement investors to add REITs to a portfolio.

REITs for Retirement: T. Rowe Price Global Real Estate Fund (TRGRX)

REITs for Retirement: T. Rowe Price Global Real Estate Fund (TRGRX)Trailing-12-Month Yield: 2.1%

We’ve all heard the expression “location, location, location.” When it comes to REITs, that location doesn’t have to mean just the United States. According to industry group NAREIT, since their creation, more than 30 nations have adopted the REIT tax structure. And just like U.S. REITs, international real estate holdings can offer high dividend yields, inflation protection and added diversification benefits.

But adding those international REITs are a tad bit difficult — which is where the T. Rowe Price Global Real Estate Fund (MUTF:TRGRX) comes in.

The actively managed mutual fund will comb the world for the best REIT and real estate opportunities — no matter where they are located. However, the fund’s mandate does indicate that it will always hold some U.S. REITs. Right now, the fund is roughly split between U.S. and international holdings. That makes it a perfect holding for gun-shy retirement investors who don’t want to go full-bore into foreign stocks.

Regarding performance, the addition of international REITs has worked for TRGRX’s benefit. The fund has managed to return 12.6% annually since its inception in 2008.

Expenses for TRGRX run at 1.05%, which isn’t outrageous considering how hard it is to access some of its holdings.

As of this writing, Aaron Levitt did not hold any of the aforementioned securities.

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