| Diversify
Your Portfolio by Investing in REITs |
Published: March 22, 2004
For those of you unfamiliar with this unique
income-oriented asset class, Real Estate Investment Trusts -- or REITs
-- are companies that own real-estate-related assets such as land,
buildings and real estate securities. Most firms in this industry make
their money by purchasing real estate properties and renting them out to
consumers and corporations. Meanwhile, others merely purchase
real-estate-related securities such as mortgage bonds and/or lend money
to fund third-party real estate projects.
Let's start off with a quick rundown of the advantages
and disadvantages associated with investing in REITs...
ADVANTAGES:
-- In order to qualify as a REIT for tax purposes, a company must return
at least 90% of earnings to its shareholders in the form of dividends.
Because of this, the average REIT boasts a roughly +6% annual dividend
yield.
-- REITs aren't as highly correlated with the major indices as most
industries are. As such, they may provide your portfolio with some
much-needed diversification and should help to smooth out your overall
returns, particularly during market downturns.
-- REITs own hard, tangible assets such as land and buildings, and often
sign their tenants to long-term lease contracts. Because of this, REITs
tend to be some of the most stable companies on the market.
DISADVANTAGES:
-- Because they can only reinvest up to 10% of their annual profits back
into their core business lines each year, most (but not all) REITs tend
to grow at slower clip than the average stock on Wall Street. Over time,
history has shown that the average publicly traded REIT tends to post
annual earnings growth several percentage points below that of the
S&P 500.
-- Although the business tends to be a fairly stable one, REITs are not
without risk. For example, their dividend payments are not guaranteed
and the real estate market is prone to cyclical downturns.
-- Since they already enjoy a unique tax-advantaged status versus other
firms (more specifically, they are allowed to deduct the dividends they
pay out from their taxable income), from an investor's perspective,
roughly 2/3 of all dividends paid by REITs do not qualify for the
new lower 15% tax rate implemented by congress last year. By contrast,
the vast majority dividends paid by non-REITs are taxed at this new low
rate.
WHAT TO LOOK FOR IN A GOOD REIT
When investing in REITs, my staff and I generally start by looking at
the same fundamental factors that we examine for all other equity
investments. We seek out companies with solid track records, winning
management teams, reasonable valuations and favorable growth prospects.
In addition to this analysis, serious REIT investors should also pay
close attention to:
Geographic Diversification -- Large, broadly
diversified companies have less exposure to regional economic weakness
and/or natural disasters than their smaller counterparts.
Current Dividend Yields -- When investing in
REITs, we generally look for stocks that pay above-average annual yields
of at least +6%.
Long-Term Dividend Growth -- We also look for
companies with long track records of consistent, growing dividends.
Dividend Payout Ratios -- You can calculate
this ratio by taking a firm's annual dividend payment per share and
dividing that figure by its EPS (earnings per share). The payout ratio
gives a measure of the percentage of its earnings a firm pays out in the
form of dividends. Since REITs are required to pay out at least 90% of
their earnings in the form of dividends, most of these firms carry a
relatively high payout ratio. However, occasionally a company may pay
out over 100% of current earnings in the form of dividends. Since this
type of payout ratio is unsustainable over the long haul, many of these
firms are eventually forced to lower their dividends. Therefore, when
searching for high-quality REITs we usually look for companies with
payout ratios below 100%.
DRIP Available? -- We also like to know whether
or not a particular company offers a dividend reinvestment plan, or
DRIP. Among their many benefits, such plans help to minimize or
eliminate the transaction fees that one would otherwise have to incur in
order to reinvest his/her dividend payments back into the underlying
stock. To view a comprehensive listing of all REITs that currently offer
dividend reinvestment plans, please visit this link:
http://www.investinreits.com/drips.cfm
WHAT TO WATCH OUT FOR WHEN INVESTING IN REITS
The most common mistake that REIT investors make is to focus exclusively
on dividend yields. After searching for and investing in those companies
that offer the highest yields on the market, many investors blindly sit
back and wait for the cash to roll in. The problem with this strategy,
of course, is that corporate dividend payments are by no means
guaranteed. Those investors who purchase a particular REIT solely for
its current dividend yield could be setting themselves up for serious
disappointment.
LISTING OF ALL AVAILABLE PUBLICLY TRADED REITS
Now that you know a bit more about what to look for in a good REIT, if
you're interested in investing in this unique sector, then it's time to
take a closer look at the choices available to you. Visit the link below
to view a comprehensive listing of all publicly traded REITs on the
market today. All companies are grouped according to the primary type of
real estate they invest in (offices, industrial buildings, regional
malls, apartment complexes, etc).
http://www.nareit.com/nareitindexes/indexconstituents.xls
WHICH OF THESE REITs ARE LIKELY TO OUTPERFORM THEIR PEERS?
If you find the listing above to be a bit overwhelming, then you're
not alone. With so many options to choose from in the REIT sector, it's
hard to know where to start. Fortunately, my staff and I are here to
help. We've narrowed down the extensive list of companies above to only
those with the greatest potential to deliver above-average dividends and
capital gains over the long haul, and we've placed this select group of
companies into a special "Income Portfolio" on our web site.
However, access to this portfolio is available exclusively to fee-paid
subscribers (and limited-time trial members) of my Market Advisor
newsletter. Subscribe to this completely separate newsletter today at a
special introductory rate of $49.95 per year and you'll also receive six
free in-depth research reports. To learn more, please visit:
https://www.streetauthority.com/holidayoffer-ma.asp
|
|
|
Please Note: The above article was merely a
small excerpt from an issue of our premium, long-term-oriented investing
newsletter -- the Market Advisor. To receive your copy of
our most recent Market Advisor newsletter, as well as other
guidance similar to this every other week, you'll need to subscribe to this
publication. To learn more, please visit the following link: https://www.StreetAuthority.com/subscribe-ma.asp |
Special
Deal for Our Web Site Visitors
