Real estate investment trusts
Real estate investment trusts, or REITs, are required to distribute at least 90 percent of their taxable income to unit holders. As with MLPs, a portion of the dividends may be a return of capital.
Also like MLPs, REITs borrow money to invest. But REITs invest in real estate instead of energy. This means they are sensitive to declines in the real estate market as well as rising interest rates.
"In 2013, a number of REITs, especially those focused on mortgages, fell in value as the 10-year Treasury rose," says Ben Marks, chief investment officer of Marks Group Wealth Management.
REITs fall broadly into two categories: Some buy, hold and manage a portfolio of properties, such as shopping malls or apartment complexes. Others focus on buying and selling mortgages in the secondary mortgage market. "We avoid the mortgage REITs altogether and look for those that own higher-quality properties, because they are less correlated to interest rates," says Marks.
A number of REITs offer dividends in excess of 6 percent, and some dividend yields go as high as 15 percent. However, the highest dividend yields may be due for a fall. "A number of REITs have lowered their dividends over the past couple of years, because their net investment income has fallen radically as their borrowing costs have gone up," says Ghosh. "Again, dividend payout history is important."