PALO ALTO, Calif. (CNN/Money) -
An alert investor I know asked me a simple question the other day: If I find a REIT paying upwards of an 8 percent dividend yield, isn't that a no-brainer investment?
The short answer is an unqualified yes. The longer answer -- and let's face it, if there weren't a longer answer, it'd be tough to fill up this column -- is probably.
But first, a little on REITs. A REIT is a real estate investment trust, for our purposes a publicly traded company that buys and holds various kinds of housing, retail or commercial projects. Before REITs existed, buying real estate as an investment (as opposed to one's home) was mainly for rich people. REITs work nearly like other kinds of public companies, meaning you can buy shares in them, making a real estate investment available to the masses.
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Unlike other public companies, REITs are required to pay out most of their earnings to shareholders. That's why the yields are so attractive. Managers of REITs have a very good sense of what their earnings streams look like because of the rents their tenants pay. So their dividends tend to be large and predictable.
Consider three REITs recommended by Deutsche Bank Securities analyst Louis Taylor: Heritage Property (HTG: Research, Estimates), Ramco-Gershenson Property (RPT: Research, Estimates), and Reckson Associate Reality (RA: Research, Estimates).
Each yields well north of 8 percent on its annual dividend.
So should you buy?
So in an age when money-market accounts pay less than 2 percent, doesn't it make sense to own some REITs? Well, yes. If earning income on your investments is your primary goal.
One simple way to go about is with a mutual fund. For example, I've invested in the Vanguard REIT Index Fund, which simply tracks the performance of the Morgan Stanley REIT Index of more than 100 large REITs.
But as with any high-yielding investment, there's a reason for the market-beating yield: Risk. There's market risk, execution risk, interest-rate risk.
Most importantly, there's risk the underlying value of the equity will go down. And there's the issue of taxes, which you still pay on dividends. (Even if President Bush's proposal to exclude taxes on dividends goes through, REITs wouldn't likely be included.)
What's more, REITs have had a good run. Like bonds, they've been dynamite investments in the bear market. Buying them for their equity upside now seems a little foolish. But for folks able to park some cash who want decent returns on them, real estate still is a good way to achieve that goal.
So why the above-mentioned "probably" on whether it's a good idea to buy a REIT? Because in investing, there's no such thing as a no brainer. Don't let anyone tell you otherwise.
Adam Lashinsky is a senior writer for Fortune magazine. Send e-mail to Adam at lashinskysbottomline@yahoo.com.
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