Important Updates for Investors
Carla Pasternak's Premiere Issue of High-Yield International Just
Released
Income expert Carla Pasternak's debut issue of High-Yield
International covers a Taiwanese manufacturer yielding 9.5%... a
rare Mexican monopoly yielding 13.4%... and other top-performing
investments yielding up to 19.0%.
Government's Biofuel Timetable Could Spell +15,900% Growth
+15,900% growth might seem far-fetched... but it's not. In fact, it
is mandated by law. And I've identified the ONLY stock positioned to
capture this growth.
The
Silver Lining to a Falling Dollar
Despite the U.S. national debt, there is a silver lining for income
investors. This massive spending, combined with movement out of U.S.
Treasuries, is going to take its toll on the dollar, and
international income investors could reap the rewards in the form of
higher dividends. |
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REITs With Unbeatable Track Records |
Published: July 1, 2004
REITs, short for real estate investment trusts, offer
some of the richest dividends on the market today. These unique stocks
make their money by investing in real estate. Many own land or buildings
directly and make their money by renting out this available space.
Meanwhile, others hold real estate related assets such as
mortgage-backed securities.
Fat Yields
Some REITs may yield 10% or better, but most average 6% to 7%. That’s
three times more than the average 2% yield sported by the 374
dividend-paying stocks in the S&P 500.
What’s behind the big payouts? Simply, REITs are legally required to
pay out 90% of their taxable income as dividends. In return, REITs can
deduct these payouts from their reported income for tax purposes. As
such, most REITs pay little to no taxes.
One hitch is that since REITs don’t pay income tax, their dividends
are mostly taxed as ordinary income, up to 38.6%. Unlike other stocks,
REITs don’t qualify for the new 15% dividend tax rate. Even after the
higher tax rate, though, REIT dividends will put more cash in your
pocket than most other stocks. In addition, you can defer taxes by
stashing your REITs in a tax-advantaged IRA or avoid taxes altogether by
placing them in a Roth IRA.
Another potential downside to REITs is that because of their hefty
dividend payouts, these firms are only able to reinvest a maximum of 10%
of annual profits back into their businesses. As a result, REITs
typically grow earnings at a slower-than-average pace. In many cases,
this translates into slower dividend growth. Compared to the 7%
five-year dividend growth rate shown by S&P 500 stocks, REIT
dividends have grown less than 2% over the same time. The good news is
that there are exceptions to this general rule, as you’ll see in the
REITs we profile below!
And looking at the broader picture, slow dividend growth certainly
hasn’t kept REITs from running up stunning returns. In the bear market
of the last three years, the benchmark Morgan Stanley REIT Index gained
+103% compared to the S&P 500, which lost -24%. As the market
recovered in 2003, the S&P 500 gained +26%, but REITs still outpaced
the market with nearly +37% returns.
Interest Rate Jitters
REITs continued their run-up in the first quarter of 2004, rallying
+12% and easily topping the market’s paltry +1% gains. However, fears
of rising interest rates have weighed heavily on this sector ever since.
In fact, the average REIT has lost over -10% of its value since April.
That compares unfavorably to the market’s +1% recovery.
The problem is that when interest rates rise, real estate investors
often head for the hills. Since most REITs borrow heavily in order to
fund new real estate purchases, the fear is that the industry's bottom
line may be hard hit by higher debt-servicing costs. Another fear is
that rising rates will make low-risk bonds more attractive than
dividend-paying stocks such as REITs. Expecting REITs to decline as
rates rise, investors have dumped these stocks ahead of the anticipated
round of continued Fed rate hikes in the coming months.
Our belief is that savvy investors should view the recent pullback as a
selective buying opportunity. Yet with nearly 200 publicly traded REITs
on the U.S. market, it's often hard to separate the wheat from the
chaff. With that in mind, in this month's issue my staff and I set out
to help you identify a number of REITs that now look attractive.
Yields To Trounce Interest Rates
After carefully sifting through hundreds of companies, we recently
uncovered a handful of REIT investment ideas that we believe are well
positioned to thrive in a rising interest rate environment. All are
relatively insulated from higher interest rates and all should benefit
from an improving economy going forward. Thanks to their solid
performance and stellar long-term prospects, each of the companies we
identify below offers a safe dividend and a good deal of capital
appreciation potential.
One of our picks sports above-average dividend growth that should easily
outpace a measured rise in interest rates. Neighborhood shopping center
owner Kimco (KIM, $46.25) has grown its dividend a dramatic 10% a year
for the past five years. The stock has increased its dividends three
times faster than its peers and over six times faster than the overall
market.
Also attractive is hotel owner Hospitality Properties Trust (HPT,
$42.50). The firm's five-year average dividend yield of 7% to 10% gives
it a leg up on lower-risk fixed-income investments.
As shown below, both REITs have delivered market-beating returns
throughout the past 12 months. The chart below shows the one-year
performance of Hospitality Properties Trust (HPT) and Kimco Realty (KIM)
against the S&P 500 (GSPC).
Property Type
Both REITs hold property portfolios that are well suited for an
expanding economy. Hospitality’s hotels should benefit from an
expected rebound in business spending and travel. Meanwhile, a portfolio
of neighborhood shopping centers such as Kimco’s should deliver steady
earnings growth throughout nearly every economic cycle.
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REIT ETFs
In addition to owning individual stocks, a quick way to profit from the
industry’s high returns is to buy an entire index of REITs. With REIT
ETFs, you can hold a cross-section of property types in one simple
security.
ETFs, aka exchange-traded funds, pay dividends and capital gains that
mirror the returns of the index or group of securities they track. Think
of ETFs as a cross between stocks and mutual funds. Like stocks, ETFs
trade on major exchanges such as the American Stock Exchange (AMEX).
Like index funds, they represent an interest in a basket of underlying
securities. As managed funds, ETFs do charge a management fee. However,
since they are not actively managed, these fees tend to be fairly
minimal. Since they trade in the open market just like stocks, you'll
need to pay a transaction fee to purchase an ETF. But again, these small
fees tend to be fairly insignificant for the long-term investor.
Together with the capital gains potential, REIT ETFs pay attractive
quarterly dividends just like the REITs they track. These payments are
derived from dividends received from the REITs they hold, as well as
capital gains earned from these holdings. The capital gains portion is
taxed at the reduced long-term capital gains rate of 15% (if held for
more than a year).
Although only a handful of REIT ETFs are available, two particular funds
provide superior long-term growth and income potential...
Important Note: To
view the remainder of this article, which includes an analysis of our
favorite REITs and REIT ETFs, you'll need to read the July 2004 issue of
our premium High-Yield Investing newsletter. If you
haven't already subscribed to this newsletter, please visit
this link to gain immediate access to this premium content.
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Please Note: The above article was merely a
small excerpt from an issue of our premium income newsletter -- High-Yield
Investing. In each issue Carla Pasternak presents
a wealth of information and timely investment ideas to help you earn a
steady income stream from your investments. To receive a
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