Creating The Ideal Diversified REIT Portfolio

by: Kevin Quon

The ability to directly tap into property ownership without bearing the full liability of that ownership is what makes the real estate investment trust (REIT) an amazing financial tool. As is the requisite for REITs to maintain their designations, such corporate entities are required to distribute 90% of their taxable income into the hands of their investors in order to maintain their tax reductions on the corporate level. Such a requisite in essence creates a structure that offers investors an ongoing income stream from the underlying investment portfolio.

Diversification is possibly the oldest and most fundamental investing principle known to man. From its use by medieval farmers in agriculture to its current adaptation to portfolio protection on the financial markets, the ability to diversify ones holdings offers an innate insurance against the unpredictability that makes up life. It can protect against catastrophic failure while offering additional interests in sectors that might do better than initially expected. Creating a diversified dividend portfolio requires the ability to round out industry exposure for a balanced yield and overall stability. It is the simplest method for stability in a market that offers volatility.

Investors looking to protect the consistency of their income streams would do well to diversify their revenue sources. The following holdings offers a sample of a REIT portfolio diversified by industry. All values are listed as of January 22, 2012:

Company Market Cap. Trailing Div% Industry
Government Properties Income Trust (NYSE:GOV) $1.13 B 7% Government Properties
Hatteras Financial Corp (NYSE:HTS) $2.10 B 14.3% Mortgage Debt
AvalonBay Communities (NYSE:AVB) $12.15 B 2.8% Apartment Communities
Macerich Co. (NYSE:MAC) $7.19 B 3.9% Shopping Centers
Piedmont Office Realty Trust (NYSE:PDM) $3.15 B 7.1% Office & Industrial Complexes
Plum Creek Timber Company (NYSE:PCL) $6.42 B 4.2% Forest Products
Sovran Self Storage (SSS) $1.24 B 4% Self-Storage Facilities

Macerich and Piedmont are two investments that should thrive as the economy begins to pick up momentum. These two companies cover industries that represent a strong consumer, manufacturing, and services sector. Hatteras Financial, as an agency mortgage REIT, will remain consistently lucrative while interest rates are set low by the government, as seen in the present day. This accounts for the high yield dividend that is currently offered.

Government Properties Income Trust is often thought of as a protective approach to real estate investment. The entity primarily owns and leases offices buildings that are leased by government tenants which are seen to be more stable and less likely to relocate. As a spinoff IPO of CommonWealth REIT (NYSE:CWH), Government Properties Income Trust currently offers a very nice dividend for a play often seen to be more recession resistant. Investors in GOV and CWH should be aware of the external management company that manages over both.

AvalonBay Communities provides a stable investment into apartment communities. As witnessed during the Great Recession, there was a migration of families from single family homes into apartments and multifamily communities. Though punished all the same as the market irrationally fell together, AvalonBay's underlying fundamentals continued to thrive even in the midst of financial depression. This allowed for its recovery to pre-recession highs.

Plum Creek Timber Company and Sovran Self Storage offer two offshoot industries that can diversify a portfolio's income away from the real estate market's fluctuations. Plum Creek's ownership over timberlands creates a renewable income source dependent on the basic commodity of lumber. Sovran Self Storage offers an income stream dependent on the need for storage space, an industry that grows with increased population mobility and relocation.

Disclosure: I am long CWH.