Investing In Real Estate Investment Trusts

All investors are looking for increased investment yields in a low interest rate environment. You may not be aware of this but you can generate some great yields by investing in one particular type of stock. This type of stock is known as REITs. The term REIT stands for real estate investment trusts. These are companies whose primary operations stem from investing in real estate. This can be in the form of owning commercial properties or buying residential real estate mortgages.

Why REITs are Attractive

Here’s why I think real estate investment trusts are attractive investments right now.

Rebound in the housing market

Many of the homebuilders and housing related stocks have released earnings that have been subpar at best over the past few years. Sales, earnings, and profitability are all down. The sector is still in the doldrums and many investors have abandoned it. Despite all of the negative news companies are expecting a rebound in the sector. Most CEOs are very optimistic about the residential real estate sector over the long term.

While the commercial real estate sector did not drop off the cliff like the residential sector (at least not yet!) companies are seeing increased demand in the sector. Retail and commercial stores are hiring again. Occupancy rates are rising at malls and shopping centers as well. Many REITs have been able to obtain favorable financing that has allowed them to reduce and eliminate their long term debt. A robust economy is great for the commercial real estate market.

Rising dividend yields

Some of the best yields in the market can be found in the real estate sector. You can find many REITs with yields of 3.5% and upwards. There are a number of quality companies paying investors yields in the 5% range. The only other two industries offering comparable yields are in the utilities and telecommunication industries.

As the economy continues to improve rising earnings will lead to rising dividend payments for REIT shareholders. Since REITs are required to pay out 90% of their earnings to shareholders in the form of distributions they are great investments for dividend investors. At a time when solid dividend yields are hard to find the real estate sector keeps serving them up.

Low stock prices

Timing is one of the most important factors in any investing decision. A good investment is one in which all of the fundamentals line up properly. It’s when the right company is selling at the right price at the right time. If you purchase the stock of a good company at the wrong price you have made a bad investment.

Many real estate stocks are a bargain right now and are trading at discounted levels. While other sectors look overvalued there are many REITs that look undervalued right now. These low prices have led to some rather impressive yields. You can find some companies trading at book value and sporting P/E ratios lower than their historical averages.

Now is a great time to get long positions in real estate investment trusts. While I still would not buy the stocks of homebuilders I would look to acquire REITs due to their generous yields.

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13 Responses to “Investing In Real Estate Investment Trusts”

  1. I love REITs. I’ve been in AGNC and CIM for a while now. I do it inside my Roth IRA so I don’t have to pay taxes on the dividends, and it’s been very profitable over the last year or so.

  2. avatar JT McGee says:

    REITs are great, I just wish there were more (any!) residential real estate, pure-play REITs. Commercial exposure isn’t nearly as attractive to me.

  3. @Kevin, I have been in AGNC for a while and I am very pleased with it. Plus, investors have been driving up the price lately chasing the yield.

    @JT, there are REITs that invest solely in residential mortgages, such as AGNC. The REIT invests only is mortgages backed by Freddie and Fannie, so there is a level of principal security (albeit that the REIT is leveraged…)

  4. REITs do seem to be coming back…but at the dividend yields you describe, I just see safer plays, and that includes stocks with larger price gains. ADP is paying over 3% and has risen 10% in the past year. Again the “sin” stocks (i.e. cigarette makers) are probably still the most attractive dividend payers, but I can’t bring myself to invest in them. I just wrote an article about 5 alternatives to savings account and included REITs in them.

  5. avatar Evan says:

    How do you feel about the non-traded REITS?

  6. avatar retireby40 says:

    I’m invested in rental properties so I don’t really look at REIT. Is this a fallacy?

  7. avatar Sonya says:

    All this investment talk sounds fascinating and can probably go on for hours, but I am behind investing in real estate my hubby and bought an income home and are in the process of looking for tennants. Soon we’ll be making trips to the bank.

  8. avatar Toby says:

    Great article. REITs are great if the price is right. At this point in time I find the market is to heavily pushed into REITs with investors clamoring to get in on those specifically focused on rental property focused REITs. I have owned rental property in the past- an REIT is truly preferable- much less stress. But only when the price is right.

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