Getting a Fraction of the Multibillion-Dollar Action
(Business 2.0) – If you find the idea of juggling multiple mortgages a bit daunting, you can always buy shares in a publicly traded REIT. A REIT, or real estate investment trust, is a company that owns and leases commercial property, such as shopping malls, office buildings, and retirement homes. Created by Congress in 1960, they are designed to give ordinary Joes a chance to own real estate once reserved for the very wealthy. As part of the deal, REITs must return 90 percent of their annual taxable income to shareholders through--you guessed it--cash dividends.
Just how much cash? The composite REIT index tracked by the National Association of Real Estate Investment Trusts (Nareit) has returned an annual dividend yield of 6.7 percent since 1999. Even better, you stand to gain from a rise in the share price as well. In fact, the stocks in Nareit's equity index have produced a compounded annual return of 12.5 percent over the last 20 years--a figure that bests the Dow Jones industrial average, the Russell 2,000 index, and the Nasdaq composite. "You get a steady income, but you also get asset appreciation," says REIT guru Ralph L. Block, senior portfolio manager at Phocas Financial and author of Investing in REITs. "They are the perfect hybrid investment."
REITs are also unique because they can offset the effects of inflation over the long term. When costs go up, new developers charge higher rents, and thus existing property owners can eventually raise their rents too. For that reason, REITs can be a great way to diversify a portfolio loaded with stocks and bonds. There are currently 195 publicly traded REITs, most of them listed on the New York Stock Exchange. You could do worse than taking Block's recommendations (see "REITs on the Rise," below); since 1995, funds that he has managed or co-managed have outperformed the Nareit index every year but one. -- C.H.
REITS ON THE RISE
Note: Yield calculated as of July 29. Source: Phocas Financial