Real estate investment trusts (REITs) and sector-related exchange traded funds (ETFs) are a good source of attractive payouts in a low-yield environment.
REITs are securities that trade like a stock and invest in real estate directly through property ownership or mortgages. Consequently, revenue are mainly generated through rents or interest on mortgage loans. To qualify for special tax considerations, the asset also distributes the majority of income, about 90% of taxable profits, to investors as dividends.
The iShares Dow Jones US Real Estate Index Fund (NYSEArca: IYR) is one of the REIT ETFs benefiting from a favorable interest rate environment this year.
A Federal Reserve interest rate hike is the largest risk the REITs industry has faced.
While the high dividend yields in REITs are attractive in a low-rate environment, the asset is less enticing once safer Treasuries show higher rates. Moreover, as rates rise, REIT interest payments also rise, so firms are left with less cash flow available for dividends.
For now, REITs have been rebounding after a dovish Fed anticipated only two rate hikes this year from a previously expected four increases.
The weak April jobs report has also fueled expectations that the economy may not be strong enough to support further rate hikes, potentially diminishing the likelihood the Fed would change its benchmark rates in the upcoming June meeting. If the Fed does decide to push off interest rate normalization, investors may continue to steer toward REITs for yields.[related_stories]