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We have identified five residential real estate investment trusts (REITs) that will benefit the most from the anticipated recovery of U.S. housing markets. The residential REITs portfolio of these five stocks that we have constructed offers a dividend yield of 3.87%, with a beta of 1.27.

U.S. housing markets, which we believe have bottomed, are showing signs of a recovery. In a previous report, we reviewed some of the most recent developments in the U.S. housing sector. The Case-Shiller Home Nationwide Price Index increased by 1.14% in June compared to the previous month, and according to a survey conducted by Fannie Mae, prices will continue to surge in the coming year. Another index, the Freddie Mac Home Price index increased by 4.8% in June compared to March this year. This is the largest surge in eight years. Vacancy rates reached the lowest since 2Q2002. Over the past six years, homes have shed over 30% of their values. However, by contrast, residential rents have increased by 14% over the same period.

Equity Residential (NYSE:EQR)

Equity Residential (EQR) owns and operates 427 properties in 15 states. The company, during the second quarter of the current year, generated a turnover of $543 million against $480 million during the same quarter of the previous year. However, net income decreased from $581 million the prior quarter to $108 million in the second quarter of the current year. The decrease in the bottom line was largely due to a decrease in discontinued operations from the first to the second quarter. Income from continuing operations increased over two folds to reach $36.5 million. The stock offers a handsome divided yield of 2.27%. The company paid $109 million in dividends in the second quarter. The dividend distributions are sufficiently sustainable. This we say after looking at the company's funds from operations. For the second quarter of 2012, the company generated funds from operations of $208 million against $184 million in the same quarter of the previous year.

Sun Communities Inc. (NYSE:SUI)

Sun Communities (SUI) manufactures, owns and develops housing communities, largely in the Southeastern and Midwestern regions of the U.S. The company generated $82.4 million in revenues during the second quarter of the current year, which is 20% above the revenues it generated during the same quarter of the previous year. Most of the growth was associated with the increase in income from real property, revenue from home sales, and rental home revenues. Total expenses surged by 16% over the previous year. Property operating and maintenance expenses were mostly blamed for the surge. Net income of $2.5 million against a loss of $0.9 million in the first quarter shows the improvements in results. Funds from operations for the second quarter were $22.7 million against $16.4 million in the same quarter of the previous year. Among the REITs being considered in our portfolio, Sun Communities offers the highest dividend yield of 5.5%. The company paid $60 million in dividends, which makes the dividend distributions sustainable.

Home Properties Inc. (NYSE:HME)

Home Properties (HME) operates as another residential REIT, with a high dividend yield of 4.17%. The company paid dividends of $40 million during the second quarter against funds from operations of $57.6 million. This reflects that the company generates enough cash to continue the dividend distributions in the future. Total revenues that the company generated during the second quarter increased by 15.4% over the previous year. Much of this surge was associated with rental income. Total expenses also witnessed an increase of 12% over the previous year. An increase in depreciation and other expenses was primarily blamed for the surge in overall expenses. Net income surged by 59% over the previous year.

Avalonbay Communities Inc. (NYSE:AVB)

Avalonbay Communities (AVB) offers a dividend yield of 2.75% compared to the prevailing 10-year treasury yield of 1.67%. It paid $92.5 million in dividends during the second quarter, while it generated $128 million from funds from operations. This shows that the company has enough resources to sustain this dividend distribution in the foreseeable future. For the second quarter, rental and other income drove revenues to increase by 10% over the previous year. Expenses remained relatively flat, which suggests that the company managed its expenses efficiently. Income from continuing operations increased by almost a 100% and reached $60.6 million.

United Dominion Realty Trust, Inc. (NYSE:UDR)

Like the rest of the residential REITs included in our portfolio, UDR offers a handsome dividend yield as well. The offered dividend yield of 3.4% is backed by sufficient funds from operations. The company paid $0.22 per share in dividends during the past three quarters, and generated $0.33 per share in funds from operations. Turnover for the second quarter of the current year increased by 18% over the previous year. Much of this increase was associated with the increase in rental income.

Source: 5 REITS To Buy On The U.S Housing Recovery