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.
SEE MORE: Prepping for Wider REITs ETF Sector Adoption
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]IYR “seeks to provide investment results corresponding to the Dow Jones U.S. Real Estate Index, its benchmark index. The ETF charges an annual net expense ratio of 0.43%, which is slightly above the real estate category’s average of 0.38%. As of July 11, 2016, the fund had total net assets of $4.64 billion and a 20-day average daily volume of 2.25 million shares, which provides investors with a high degree of liquidity. The fund returned 12.05% YTD as of June 30, 2016,” according to Investopedia.
The sudden spike in interest for REIT ETFs may be due to the pending GICS sector elevation of REITs as the REITs category remains underweighted in many actively managed mutual funds.
Related: 44 Best REITs ETFs to Generate Yields
REITs may continue to experience a short-term boost in the months ahead as the S&P Dow Jones Indices stated it would add an 11th sector to its Global Industry Classification Standard, creating a new Real Estate Sector from the Financial Sector. The changes to the S&P 500 index will be implemented after the close of business on September 16, 2016.
IYR’s “top five sub-industry allocations are 27.11% specialized REITs, 20.3% retail REITs, 13.04% residential REITs, 9.83% office REITs and 9.79% health care REITs. As of June 30, 2016, the fund had a trailing 12-month yield of 3.94% and a 30-day SEC yield of 3.25%, which is attractive to investors,” adds Investopedia.
For more information on real estate investment trusts, visit our REITs category.
iShares Dow Jones US Real Estate Index Fund
