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Real estate trusts (REITs) are investments with excellent track records of growth. Stock price appreciation in many of their stocks has been good to great. Combined with high dividend yields (which may be partially tax free), their track records as investments have been typically excellent.

My history

I began buying REITs about 10 years ago and am very happy with the results. Dividend yields were a major consideration, I selected REITs with high yields, over 10%, and let dividends reinvested buy more shares. Most have increased dividends over the years, however 3 did not. In total, my results have been very good in a decade when many stock investments have gone very sour.

First, the 3 that cut dividends. One cut the dividend a few years ago, but the stock did well. Dividends were reinvested so that total shares increased almost 50% and the share price ended rose sharply. They were finally bought out at a substantial premium over what I paid, the buyout value was triple my original investment.

A second stock went through a dividend cut & then was bought out. I purchased stock a second time for a modest level of dollar averaging. That investment has not worked out not too badly but evaluating performance becomes difficult with two investments and many dividend reinvestments. Using a simple cash in - cash out approach, the value today is above the original investments. Today's dividend income is higher than dividends received on the two investment purchases. However my total investment has a tax loss. I am whole on money invested but have a tax loss when reinvested dividends are included.

A third investment, in my IRA, went through a dividend cut. After many years of reinvested dividends, shares more than doubled. The investment today is 50% ahead of the original investment and current dividends are significantly greater than the original dividends received.

The remaining stocks have have done very, very well. They are each up 3, 4, 5 times or more. Dividends have been increased on a regular basis plus reinvested dividends added shares which produced a substantial increase in dividend income. On a combined basis, the REITs have preformed very well.

Advice I received on real estate investment a long time ago said that over 10 years REITs have a couple of good years, a couple bad years and the rest are in between years. That's how real estate works. Currently we are going through the difficult years, but, so far, despite the economic turn down, times have not been too bad for REITs.

REIT Index

Dow Jones Composite Real Estate Trust Index has done well in this decade:

  • 12/31/01 ..... 131
  • 12/31/02 ..... 127
  • 12/31/03 ..... 164
  • 12/31/04 ..... 203
  • 12/31/05 ..... 207
  • 12/31/06 ..... 265
  • 12/31/07 ..... 208
  • 9/16/08 ....... 198

The condensed table shows the index has had a nice run from the lows in the early part of the decade. While prior data is not available, the index probably would have been around the 100+ area for the years just prior to 2000.

Valuations

REITs have problems in valuations. Evaluating success for REITs is more difficult than with industrial companies, but a little extra effort taken to understand them can bring good rewards over the years. Each REIT publishes an EPS number that is only a partial indicator of success and does not fairly relate to the dividend. They have an alternative measure of profitability called Funds From Operations or FFO. While not simple, it is largely earnings plus depreciation along with other non cash items. FFO, published by management, is the primary measure of success and is the number used when declaring dividends.

REIT dividends generally provide good yields. In today's tough markets, large, well established REITs with excellent track records have yields of 4-5%. Many REITs have track records of continuous yearly dividend increases over the years. Some yield 10% or more in this credit crisis time, generally with varying but good track records of dividend increases. In addition, for personal investment, some of the dividends may not be taxable. Portions of can be classified as non-taxable, capital gains, 1250 income, etc. besides ordinary income.

Operations

REITs have personalities which can be is used to evaluate them. They own real estate, specializing in one area of the country or maybe the entire country. In recent years, larger ones have expanded investments outside the US. They also specialize in types of investments such as apartments, offices, stores, malls, etc. Some have a combination of these investments. A company's strategy for investing in real estate assets is key in determining its suitability for a profitable investment. Track records vary from one company to the next, but many have good to excellent track records, measured by growth of FFO and dividends.

Conclusion

REITs invest in hard assets, real estate and buildings, which hold value
over time. In times of credit crisis, these stocks maintained & increased dividends giving shares good underlying value. REITs are good investments with excellent track records of growth and raising dividends. If the dividend is partially tax free or tax preferred, so much the better.

Stock position: None.

Source: Why Buy Real Estate Investment Trusts?