Investors are parked in income yielding investments and will most likely stay there for some time as the Federal Reserve plans to keep rates low until 2015. There are about 32 dividend focused exchange traded funds available on the market, but for investors who want high yield from a different source, real estate is positioned to answer that need. Some mortgage REIT ETFs are paying yields in the 10% range.
“Housing prices are going up for the first time in 5 years, bringing REITs back into the investment spotlight. These real estate investment firms exist in over 20 different countries around the world, allowing investors to make potentially lucrative plays on housing in both emerging and developed markets. Those looking for current income should not shy away from this market; these securities must pay out 90% of their income to shareholders in order to avoid taxation at the corporate level,” Carolyn Pairitz wrote for ETFdb. [Some High Yield Dividend ETFs Flying Under the Radar]
According to Dorsey Wright & Associates data, 32 dividend ETFs collectively grew assets by 40% through the end of the third quarter compared to asset growth of 23% for all ETFs. This illustrates the popularity of these focused ETFs, signaling that investors are already piled into these investments. For those investors seeking income but want an asset class that is not already crowded, real estate investment trusts (REITs) have really decent yields. [ETF Spotlight: REITs]
The Market Vectors Mortgage REIT ETF (NYSEArca: MORT) yields 9.94% per year and costs a mere 0.40%. This is one of the highest annual yields available today. The focus is on residential and commercial mortgage loans and stocks. MORT’s year-to-date return comes in at a whopping 25.52%, which sweetens the deal. Likewise, the FTSE NAREIT Mortgage REIT Index Fund (NYSEArca: REM) follows an index that measures the performance of the residential and commercial real estate, mortgage finance, and savings associations sectors of the U.S. equity market, allowing investors to get exposure to both the front and back end of real estate. With a yield of 11.88% and a year-to-date return of 26.06%, investors will be hard-pressed to find a better deal. [Real Estate: List of REIT ETFs]
REITs are a hybrid asset class, in that they offer bond-like yields with the possibility of capital appreciation. REITs used to have a low correlation to the equity market, making them good diversification tools, but today they are considered part of a good equity allocation strategy. Unlike equities, income-generating real estate has inflation-hedging qualities because property prices move in line with inflation and rents can change as needed, reports Abby Woodham for Morningstar.
REITs are faced with the economic uncertainty in the global market and are vulnerable to rising interest rates. Those REITs with dividend growth potential can rise above market volatility a bit better. It is also important that investors consider the tax implications for these tools, as they do not fall under the 15% qualified dividend rate. Most of their dividends are taxed as ordinary income. [Mortage REITs Stumble After QE3]
Market Vectors Mortgage REIT ETF
Tisha Guerrero contributed to this article.