Real estate investment trusts (REITs) and the related exchange traded funds are favored destinations for yield-starved investors and it is easy to see why. For instance, the Vanguard REIT ETF (NYSEARCA: VNQ), the largest REIT ETF, yields over 4%.
While that is well above what investors will find on the S&P 500 or U.S. government debt, even juicier dividend yields can be found on some unique REIT ETFs. Take a look at the PowerShares KBW Premium Yield Equity REIT Portfolio (NYSEArca: KBWY). KBWY follows the KBW Nasdaq Premium Yield Equity REIT Index, which uses a yield-weighted methodology.
KBWY “which is almost seven years old, tracks the KBW Nasdaq Premium Yield Equity REIT Index. That index emphasizes mid- and small-cap high-yield REITs, making KBWY a nice complement to traditional large-cap strategies. The $356 million KBWY holds 29 stocks, but with a price-to-earnings ratio of over 49, it is richly valued relative to traditional small-cap strategies,” according to InvestorPlace.
Still, KBWY has a trailing 12-month yield of over 7%.
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.
With interest rates still low in the U.S., another REIT ETF to consider is the iShares Mortgage Real Estate Capped ETF (NYSEArca: REM). REM currently yields nearly 8.7%.
REM and its holdings faced headwinds last year as market participants came to grips with the fact that the Federal Reserve would raise interest rates for the first time in nearly a decade. Mortgage REITs have exhibited a negative correlation to interest rates changes, especially if the yield curve flattens. Many agencies use leverage to capitalize on the arbitrage spread between short- and long-term interest rates, so companies can still make money in a rising rate environment, as long as long-term rates rise faster than the short-term rate or if the yield curve steepens.
REM “features a heavily concentrated lineup. Just two stocks — Annaly Capital and AGNC Investment REIT Corp. (NASDAQ: AGNC) — combine for almost 28% of this REIT ETF’s roster. REM has a three-year standard deviation of 11%,” according to InvestorPlace.
For more information on real estate investment trusts, visit our REITs category.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.