REITs can boost yield returns, but buy cautiously |
| By Laura Bruce • Bankrate.com |
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If you're looking to increase your portfolio's income,
real estate investment trusts, known as REITs, might be an option
worth exploring.
Research has demonstrated that REITs can add return
while reducing risks, even for fixed-income portfolios, since the
correlation between equity REIT returns and other stocks and bonds
is relatively low. REIT yields are noticeably better than those
of stocks, although down considerably from a few years ago.
But do your homework. While some experts say REITs
still seem capable of generating decent returns for another couple
of years, others say the sector is showing signs of slowing, and
it may be a little late in the cycle.
REITs, according to the National Association for Real
Estate Investment Trusts, or NAREIT, are companies that own and
most often actively manage income-generating real estate -- usually
commercial. For this article we'll be looking at REITs that you
can buy as individual stocks or in mutual funds.
NAREIT says REITs are up 22.5 percent from January
2006 through September 2006. In addition, their returns over the
last 10 years are impressive. The total return consists of the stock
price appreciation and the dividend yield.
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| Equity REIT index |
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| Compound
annual total returns |
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The equity REIT index has an average dividend yield of 3.86 percent. The yield has dropped steadily from 7.52 percent in 2000. Nevertheless, the current yield remains significantly higher than the average yield of the S&P 500, which was 1.85 percent at the end of September, according to Standard & Poor's.
And when bond interest rates were declining several
years ago, REIT yields surpassed them by several percentage points.
Advocates say that's the whole idea; that the diversification smoothes
out income over the long term.
REITs generally have high yields because they must
distribute at least 90 percent of their taxable income to shareholders
each year to qualify for tax breaks. In the following chart, components/price
is the percentage change in the overall average price per share
in the index when compared to the previous year.
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| Equity REIT index |
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| Year |
Total return (%) |
Components/price (%) |
Dividend yield (%) |
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*As of 10/4/2006 |
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Source: NAREIT
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"The strong performance is a good story, and
we encourage investors to look at it," says Abby McCarthy,
senior director of industry information and statistics for NAREIT.
Ibbotson Associates, the asset allocation company, looked at 30 years of data and found that by adding real estate to a well-diversified investment portfolio, return is increased and risk is decreased. Even a portfolio consisting entirely of bonds and Treasury bills showed higher returns and lower risks over the long run when REITs were added.
The real estate trusts have consistently outperformed
the S&P 500, the Dow Jones, the Russell 2000 and the Nasdaq
averages for five, 10, 15 and 20 years.
You can buy REITS as individual stocks or mutual funds.
Most real estate mutual funds own the same REITs you can buy individually,
but you'll get professional management plus an inexpensive way to
diversify property types and geographic locations.
Mark Carruthers, a Certified Financial Planner in
Garnerville, N.Y., describes REITs as a good investment.
"Pure and simple, it diversifies a portfolio,"
he says. "There's a misconception when people talk about REITs;
they think of real estate in general. REITs are publicly traded
companies that deal primarily with commercial properties.
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