If you’re on the market for an investment that’s been strong in recent months, kicks off nice dividends and, oh, also has relatively low risk, REIT exchange traded funds (ETFs) could be for you.
Real estate investment trusts, or REITs, generate some of the highest yields and were one of the best performers last year, writes David Fessler for InvestmentU. For instance, the Vanguard REIT ETF (NYSEArca: VNQ), which holds around 100 different REITs, gained 24% in 2010. The S&P 500, on the other hand, gained 12.8%. [Can REIT ETFs Keep On Outperforming?]
Here’s the case for REITs:
- In a low interest rate environment, REITs do relatively well because they borrow money at low rates, buy high-interest, long-term assets and investors would profit from the spread. With unemployment just below 10%, zero inflation and “quantitative easing,” the low interest rate environment may stick around for a while longer.
- REITs are required by law to distribute 90% of taxable income to their shareholders, which gives investors a stable dividend yield.
- Recently, the Vanguard REIT index surged in activity as investors dived into the market on speculation of increased M&A activity, according to PR USA. Chatter on M&A activity rose when ProLogis confirmed that it was talking with rival AMB Property about a possible merger.
While dividends on REITs are rather attractive, note that companies may cut, slash or suspend dividends at anytime, with little or no notice.
Annaly Capital Management (NYSE: NLY) and American Capital Agency Corp. (NYSE: AGNC) are two REITs that stand out from the rest of the market, as stated by iStockAnalyst. Annaly owns, manages and finances real estate investments, with assets backed by Fannie Mae and Freddie Mac. Like Annaly, American Capital also holds securities backed by Fannie and Freddie, along with Ginnie Mae. REITs that don’t invest in government-backed securities usually carry higher implied risk and little or no difference in yields.
There are plenty of worth REIT funds to choose from; it only depends on what you’re willing to pay, what kind of yield you want and what corner of the REIT market most interests you.