REITS (current REIT news)

A REIT, or Real Estate Investment Trust, is an investment vehicle created by an act of Congress in 1960. REITs were designed to provide investors with the opportunity to participate directly in the ownership or financing of real estate projects by providing them with a tradable interest in a pool of real estate-related assets.

REITs own, and often operate, income-producing real estate such as office buildings, apartments, shopping centers, warehouses and hotels.

As you may know, REITs, are dividend-paying stocks that invest in commercial real estate. Most REITs own land or buildings and make their money by renting this available space to consumers or businesses. Some REITs also earn interest on real estate securities, such as mortgage bonds.

Rich Yields
Most investors buy REITs for their rich dividends. REITs typically deliver annual dividend yields of between 6% and 7%--three times more than the average 2% yield paid out by the 374 dividend-paying stocks in Standard & Poor's 500-stock index (S&P 500). That's money in your pocket. Even better yet, the cash usually keeps coming in regardless of whether a particular REITs share price goes up or down. That's because to preserve their unique tax advantage, REITs are required by law to pay out 90% of their income as dividends to shareholders. In return, REITs are allowed deduct these dividend payouts from their taxable income. The average 6.7% yield paid out by most REITs is far higher than the tax-advantaged yield paid by most other common stocks. In addition, by holding REITs in a tax-advantaged account, say a Roth IRA, savvy investors can avoid these extra taxes entirely.

Huge Gains
Although their earnings growth tends to be a bit slower than average, this hasn't stopped REITs from posting above-average share price gains in recent years. In fact, REITs have returned a stunning +17% (including dividends and share price appreciation) per year over the last three years, far outpacing the market's paltry +2.4% annual gains. Although some investors are now concerned that REITs may have seen their best days, the reality is that the sector has delivered above-average returns for decades, in strong markets and weak ones. Studies have shown that portfolios that contain REITs tend to outperform those without REITs over the long haul. One study, for example, compared the 30-year returns of portfolios that contain 10% REITs, 20% REITs, and no REITs. The results were astonishing--the 20% REIT portfolio beat the non-REIT portfolio by nearly half a percentage point a year (although that might not seem like much, over the course of 30 years this adds up to an incredible $548,000 difference if you assume an initial investment of $100,000), and even the 10% REIT portfolio surpassed the non-REIT portfolio by a significant margin.

Reduced Portfolio Risk
Other studies have proven that adding REITs to a portfolio not only generates higher returns, but also helps reduce risk. That's because REITs generally don't move in the same direction as the stock or bond markets. In fact, it has been shown that the performance of many REITs isn't even highly correlated with the real estate market. As a result, REITs can provide you with an excellent tool to help diversify your portfolio and smooth out your overall returns. Owning shares in a REIT is really just an economical way to purchase real estate. And as we all know, real estate has real value that investors can touch, feel and understand. This tangible value makes REITs one of the most stable investment alternatives around.

Buyer Beware
Thanks in large part to their many benefits, a variety of new companies have entered the REIT arena in recent years. In fact, the number of firms in the industry has grown by about 30% and the entire market capitalization of all REITs has soared from $26 billion to $161 billion throughout the past decade. Altogether, the nearly 200 REITs that are now publicly traded on a U.S. stock exchange now manage more than $300 billion of assets. It's always important to be selective when identifying REITs for your portfolio. So, with that in mind, what should you look for in a quality REIT?

Buy the Stock, Not the Yield
Most people buy REITs for their rich dividend yields. However, investors who focus exclusively on a stock's yield could be making a huge mistake. After all, corporate dividend payments are by no means guaranteed. So even though a company might now be paying out a healthy 10% dividend yield, if the firm's business model isn't solid, then that exact same company might not be able to sustain its high payout in the years ahead. Since firms draw their dividend payments from earnings, payouts could be slashed if profits are pinched. Investors who buy a REIT exclusively for its high current dividend yield, without gauging its earnings prospects, may be in for a serious disappointment. The most profitable stocks are those that generate the greatest total return--this includes both dividends and share price appreciation. If total returns are what you're after, then looking exclusively at yield would be a very foolish, short-sighted strategy. After all, current dividend payments are usually already priced into most stocks, and they won't tell you much about the firm's potential for capital appreciation. And given that stock prices are based primarily on a company's future growth expectations, that is certainly a measure you don't want to overlook. Exceptionally high dividend yields are often enticing, but they may also be the kiss of death. If a company's yield soars above the average level paid out by its peers or fluctuates wildly, then this often serves as a red flag that there may be something fundamentally wrong with the stock. Remember, you can calculate a stock's yield by simply taking the next 12 months of expected dividend payouts and dividing that figure by the firm's current stock price. As the price falls, the yield rises. A fast-rising yield may signal that a particular company is in serious trouble. With this in mind, REITs with long track records of steady dividend growth are probably your best bet. REITs typically pay out nearly all of their income in dividends. However, you want to be wary of stocks that raise dividends at a faster rate than their earnings growth. In addition, companies that pay out more than their current earnings may eventually be forced to trim their dividends in the years ahead. Investors should steer clear of stocks with payout ratios (annual dividend payment divided by earnings per share) above 100%. Since REIT dividends don't qualify for the new lower tax rate, investors should look for companies that offer a dividend reinvestment plan (DRIP). These plans allow you to reinvest your dividend payments and buy the stock without incurring steep transaction fees. (For a listing of REITs that currently offer dividend reinvestment plans, please visit this link .)

Property Type is Key
To get a feel for the income stream from which your dividend payouts are drawn, you should always pay close attention to the type of property that each REIT owns. Many REITs specialize in one property type, such as offices, apartments, warehouses, regional malls, shopping centers, hotels, or health-care centers. Meanwhile, others, like Duke Realty (DRE), own a mix of retail, industrial, and office property. And finally, others invest in specialty properties, such as Entertainment Properties (EPR), which owns movie theatres, or Capital Automotive (CARS), which owns car dealerships. Each real estate sector is affected by different economic cycles. If the job market is booming, for instance, then office REITs such as Equity Office Properties (EOP) could be attractive. As another example, if consumer spending is on the decline, then a shopping center REIT such as Pan Pacific (PNP) might find itself headed toward challenging times. Property type can also tell you how predictable a stock's income stream might be. Thanks to the fact that they often require their tenants to sign +10-year leases, mall REITs usually generate more predictable income than apartment REITs, which tend to lease for periods of just one year at a time. Knowing the quality and diversity of its tenants will also give you a sense of the reliability of the REIT's income stream. Larger, diversified or geographically dispersed REITs are less exposed to regional weakness and major economic cycles. These REITs tend to be more stable over the long haul. A company such as Equity Residential (EQR), the world's largest publicly traded apartment REIT, owns apartments in various markets across the United States and is less sensitive to local economic conditions. On the other hand, smaller, more specialized REITs often provide the greatest growth potential. A niche-player like SL Green Realty (SLG), which owns offices solely in New York City, is highly leveraged for success in that particular market.