The Right Time for REITs

If you’ve been thinking about adding real estate investment trusts (REITs) to your portfolio, now is a good time to do so.

That’s according to Richard Stavros, chief strategist at our Global Income Edge advisory.

“True, REITs have already had a great run, tripling in value since the financial meltdown. But analysts think the revival in real estate—particularly commercial real estate—will continue through 2015,” he wrote in the April 2015 issue.

“And given the continued weakness in the US and global economies (along with the Federal Reserve’s reluctance to raise rates quickly for fear of impeding the recovery), REITs are still a superior investment compared with Treasuries and bonds.”

REITs are vulnerable to rising interest rates for a couple of reasons: higher rates make their dividend payouts less attractive to investors, and they also push up REITs’ borrowing costs to finance new projects. However, a strengthening economy also gives REITs the opportunity to raise their rental rates.

In the April Global Income Edge, Stavros also revealed a new portfolio specifically devoted to the sector. Right now, it contains eight REITs with an average yield of 6.5%. (If you’re a current Global Income Edge subscriber, you can access this portfolio by clicking here. If not, see below to learn how you can test out the publication on a no-risk trial basis.)

Below we’ll take a closer look at one REIT Stavros is recommending now. But first, here’s a bird’s eye view of how these investments work—and how you can benefit from them.

REITs 101

Picture owning rental property without the hassles of being a landlord—chasing down rent from delinquent tenants, being called out of the blue to fix a broken appliance, cleaning up after said tenants move out—and you’re starting to get a sense of what its like to invest in a REIT.

REITs typically own and manage a portfolio of income-producing properties, such as apartment buildings, shopping malls, offices and hotels. They trade on stock exchanges, just like regular corporations, making investing in real estate easy—and highly liquid.

In addition, REITs let you tap into the market at a far lower upfront cost than buying property on your own. They also let you access areas that would otherwise be difficult, if not impossible, for the average investor to get into.

REITs come in two main varieties: 

  • Equity REITs own or invest in commercial properties and collect rent from tenants. After paying the costs associated with running these assets, they then pass most of the income they collect on to shareholders as dividends. Holdings range from apartment buildings to malls, office buildings, hotels and even timberlands—though REITs tend to specialize in one specific area.

  • Mortgage REITs provide money for real estate, either directly in the form of mortgages or other types of loans or indirectly by acquiring mortgage-backed securities. Mortgage REITs represent less than 10% of the REIT marketplace, so when investors talk about REITs, they’re generally referring to the equity variety.

For many investors, REITs’ appeal boils down to one thing: dividends. According to REIT.com, dividends have accounted for about half of REITs’ long-term total returns, compared to less than one-fourth for the S&P 500.

A big reason why those payouts generally outshine the ones you get from a typical dividend stock is that REITs don’t pay tax at the corporate level, so long as they pay out at least 90% of their taxable income to investors in the form of dividends (in addition to other IRS requirements).

That means their profits are only taxed at the investor level, eliminating the double taxation most corporations must contend with.

They have another advantage, too.

“Not only do REITs have high income and returns that rival those of stocks, they usually move independently from stocks,” writes Stavros. “While your stocks are declining, your REITs may be increasing so that adding them to your portfolio decreases its volatility.”

An Established Player

US REITs came into being in September 1960, when President Eisenhower signed the REIT Act (contained in the Cigar Excise Tax Extension of 1960) into law.

Nine years later, Realty Income Corp. (NYSE: O) started up. Boasting a market cap of about $11.0 billion, Realty Income is the second-largest trust in Global Income Edge’s new REIT portfolio, and the most established.

Realty Income is known as “the monthly dividend company” because, unlike most REITs, it pays dividends monthly rather than quarterly. (As a side note, that’s a key difference from REITs based north of the border, in Canada, which typically pay dividends monthly).

The trust’s assets are well diversified: it owns more than 4,300 commercial real estate properties spread across 49 states. Only two of its tenants account for more than 5% of its revenue: Walgreens (5.5%) and FedEx (5.2%).

The majority of Realty Income’s tenants operate under net leases, meaning that in addition to paying rent to the trust, they also pay most of the operating expenses, including property taxes, regular maintenance and property insurance.

The most commonly accepted measure of REIT performance is funds from operations (FFO), which is calculated by taking net income, excluding gains or losses from property sales and adding back real estate depreciation.

In the first quarter, Realty Income’s per-share adjusted funds from operations rose 4.7% from a year earlier, to $0.67, matching the consensus estimate. Revenue gained 11.4%, to $246.9 million.

High Occupancy Rate, Rising Rents

Meantime, the trust’s portfolio remains almost fully leased: it ended the first quarter with a 98.0% occupancy rate, down slightly from 98.3% in the first quarter of 2014. Same-store rents on properties under lease gained 1.4%, to $201.1 million.

In March, Realty Income announced its 70th consecutive quarterly dividend hike. The total amount of monthly dividends paid per share in the first quarter of 2015 increased 2.6%, to $0.561 from $0.547 in the first quarter of 2014.

Realty Income’s annualized dividend rate stands at $2.274 a share, for a 4.9% yield.

7 More High-Yielding REITs to Buy Now

As I said earlier, we’ll give you instant access to Richard Stavros’s new REIT portfolio—including trusts yielding as high as 8.72%—when you take a no-risk 90-day trial to Global Income Edge today.

Plus this special deal also brings you Stavros’s new special report, “Income Afterburners,” free. This exclusive investment bulletin gives you full details on five more income stocks to add to your portfolio now.

It’s an interesting set of investments you won’t find anywhere else, but they all share one critical thing: sky-high dividend yields. If you’re at a time of your life when you need high income the most, this handy guide is must-reading.

Simply click here to get started now.