The Time Is Right for REITs

Includes: RWR, SCHH
by: Mark Riddix

All investors are looking for increased investment yields in a low interest rate environment. You may not be aware of this, but you can generate some great yields by investing in one particular type of stock known as REITs. The term REIT stands for "real estate investment trusts"; these are companies whose primary operations stem from investing in real estate. This can be in the form of owning commercial properties or buying residential real estate mortgages.

Here’s why I think real estate investment trusts are attractive investments right now.

Rebound in the housing market

Many of the homebuilders and housing-related stocks have released earnings that have been subpar at best over the past few years. Sales, earnings, and profitability are all down. The sector is still in the doldrums, and many investors have abandoned it. But despite all of the negative news, companies are expecting a rebound in the sector. Most CEOs are very optimistic about the residential real estate sector over the long term.

While the commercial real estate sector did not drop off the cliff like the residential sector (at least not yet!), companies are seeing increased demand in the sector. Retail and commercial stores are hiring again. Occupancy rates are rising at malls and shopping centers as well. Many REITs have been able to obtain favorable financing that has allowed them to reduce and eliminate their long term debt. A robust economy is great for the commercial real estate market.

Rising dividend yields

Some of the best yields in the market can be found in the real estate sector. You can find many REITs with yields of 3.5% and upwards. There are a number of quality companies paying investors yields in the 5% range. The only other two industries offering comparable yields are in the utilities and telecommunication industries.

As the economy continues to improve, rising earnings will lead to rising dividend payments for REIT shareholders. Since REITs are required to pay out 90% of their earnings to shareholders in the form of distributions, they are great investments for dividend investors. At a time when solid dividend yields are hard to find, the real estate sector keeps serving them up.

Low stock prices

Timing is one of the most important factors in any investing decision. A good investment is one in which all of the fundamentals line up properly. It’s when the right company is selling at the right price at the right time. If you purchase the stock of a good company at the wrong price you have made a bad investment.

Many real estate stocks are a bargain right now and are trading at discounted levels. While other sectors look overvalued, there are many REITs that look undervalued right now. These low prices have led to some rather impressive yields. You can find some companies trading at book value and sporting P/E ratios lower than their historical averages.

Now is a great time to get long positions in real estate investment trusts. While I still would not buy the stocks of homebuilders, I would look to acquire REITs due to their generous yields.