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Harry Domash
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Harry Domash publishes DividendDetective.com, a site specializing in high-dividend investing. He also publishes WinningInvesting.com, a free site featuring “how to” investing tutorials and other resources. His best selling book on fundamental analysis, “Fire Your Stock Analyst,”... More
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  • How To Find The Best REITs

    With the commercial real estate market gaining strength, this might be a good time to consider investing in commercial real estate. You can do that via real estate investment trusts (REITs).

    REITs trade like regular stocks, but they don't pay U.S. federal income taxes as long as they pay out at least 90% of their taxable income to shareholders. On the downside, REIT dividends are mostly taxed as regular income instead of the lower 15% capital gains rate. So it's best to keep REITs in tax-sheltered accounts.

    There are two basic types of REITs: Property REITs and mortgage REITs.

    Property REITs own commercial real estate properties such as apartment complexes, office buildings, or shopping centers. Mortgage REITs don't own properties; instead they invest in mortgages backed by real estate, typically single-family residential properties. Today, we'll focus on property REITs.

    Property REITs provide the customary management services associated with leasing properties such as apartment buildings, shopping centers and office buildings. But they can't operate properties requiring a high degree of personal service such as hotels and healthcare facilities. Instead, they must lease those properties out to third-party operators.

    Finding REITs
    You can use the free, easy-to-use screener at FINVIZ.com to find REITs. Start by going to the FINVIZ homepage (finviz.com) and then selecting Screener. FINVIZ calls its selection criteria "filters." On the Filters bar, select "All" to display all of the available filters. Use the associated dropdown menus to select the desired filter values.

    REIT Categories
    Most property REITs specialize in one of these property categories: retail, healthcare, lodging (hotels, motels, etc.), industrial, office, or mixed industrial/office. Diversified REITs own properties in multiple categories.

    FINVIZ allows you to search for REITs by those categories. Start by using the screener's Industry menu to select a category such as "REIT- Retail."

    Dividend Yield
    Dividend yields are analogous to the interest rate on a savings account. For a stock, your yield is the dividends you receive over a year divided by the price that you paid for the stock. So your yield would be 10% if you received $1 per share of dividends from a stock that cost you $10 per share. Currently, most property REITs are paying dividends equating to 3% to 7% yields.

    Use the Dividend Yield menu to define your minimum acceptable yield. I specified "Over 4%."

    Smart Money
    Thanks to the huge trading commissions that they generate, institutional investors such as mutual funds have access to information that you and I never see. Thus, it makes sense to stick with stocks that the big money likes. Institutional ownership measures the percentage of shares held by these savvy players.

    Require "over 40%" Institutional Ownership.

    Not Too Cheap
    Cheap stocks get that way because many investors see problems ahead. Whether they are right or wrong, low trading prices signal added risk, which you don't need.

    For Price, specify "over $5."

    Analyst Advice
    FINVIZ tabulates stock analyst buy/sell ratings into these categories: strong buy, buy, hold, sell, and strong sell. If anything, analysts tend to be overoptimistic. To be on the safe side, pass up stocks that the analysts are avoiding.

    Require "Buy or Better" for Analyst Recommendation.

    Forecast Growth
    For REITs, or almost every other category of stocks, the best candidates are those expected to grow earnings over the next few years.

    Because property owners must deduct non-cash depreciation expenses when calculating earnings, even if the property is, in fact, appreciating in value, reported income is unrealistically reduced by those charges and doesn't measure the actual cash flow generated by the properties. For that reason, the REIT trade association created a measure called "funds from operations" (FFO), which reflects the actual cash profits generated by a REIT's operations. Although property REITs typically report both net income and FFO, the analyst' earnings estimates that you see on financial sites for REITs are typically FFO per share estimates rather than earnings per share.

    Use the "EPS Growth Next Five Years" menu to select "over 10%."

    Price Chart
    Stocks tend to move in trends. That is, as stock that has been steadily moving up is likely to continue in that direction, and vice-versa. Thus, your best candidates are those that are trending up.

    Comparing a stock's share price to its moving average (average closing price over a specified number of days) will tell you which way a stock is moving. Uptrending stocks are trading above their moving averages, while downtrending stocks are trading below. The 200-day moving average measures a stock's long-term price action.

    Use the "200-Day Simple Moving Average" menu and specify "Price Above" to limit you list to uptrending REITs.

    My screen turned up the following REIT candidates. Click here to see what the screen turns up today.

    Residential
    • Campus Crest Communities (CCG), 5.8% yield.

    • Home Properties (HME), 4.2% yield.

    • Senior Housing Properties (SNH), 5.8% yield.

    Diversified
    • Lexington Realty Trust (LXP), 6.0% yield.

    Office
    • CapLease (LXE), 5.3% yield.

    Lodging
    • Hersha Hospitality Trust (HT), 4.6% yield.

    Please note that the REIT categories listed by the FINVIZ screener are sometimes wrong. You can find out a REIT's business by checking its profile on Yahoo! (finance.yahoo.com).

    As with any screen, consider the REITs listed to be research candidates, not a buy list. The more you know about your stocks, the better your results.

    Disclosure: I am long HME.

    Sep 24 6:50 PM | Link | Comment!
  • Best Months To Be In The Market

    Sell in May and go away? If you listen to market pundits, you've probably heard that mantra a lot in recent days. It means that you should sell all of your stocks on April 30, stay in cash until November 1, and then go back into the market.

    That's not necessarily bad advice, but, over the past 11 years, at least, you would have done even better if you sold in January and stayed out until October. In other words, you were in the market for only three months: October, November, and December. Here are the details.

    Buy & Hold
    Using the S&P 500 index as a proxy for the overall market, over the 11-year period from 2001 through 2011, you would have averaged a 1.5% average annual return if you followed a "buy and hold" strategy. That is, you didn't try to time the market. Instead you remained 100% invested the entire time. It would have been bumpy ride.

    You would have ended up in the positive column seven of those 11 years, broke even one year, and suffered losses in three years. Your best year would have been 2009 when you gained 24%. Your biggest loss would have been in 2008 when the market dropped a staggering 39%.

    Sell in May
    The Sell in May strategy means you're in the market from November through April. By following that strategy, you would have increased your average annual return over the 11-year test period to 2.3% from 1.5% for buy and hold.

    You would have enjoyed gains in eight of those 11 years and endured three losing years. But the ride would have been a lot smoother than following the Buy and Hold strategy. Your best years would have been 2010 (e.g. November 2009-April 2010) and 2011 when the strategy returned 15% in each of those years. Your worst year would have been 2001 when you would have lost 13%. In 2008, you would have gotten off easy with an 11% drop.

    Buy in October
    The Buy in October, Sell in January strategy did the best, scoring a 4.3% average annual return. Following that strategy would have netted you nine winning years and only two losing years. In the best year, 2003, you would have scored a 12% gain. Alas, in 2008, your worst year, you would have suffered a 23% loss.

    Best & Worst Months
    Looking at individual months, April, averaging a 2.7% gain over the past 11 years, was the best month to be in the market. In its best year, 2009, the market, at least as measure by the S&P 500. soared 9% April's biggest loss was 6% in 2002.

    June, averaging a 2.2% loss, was the worst month. It only recorded gains in two of the 11 years, broke even three times, and lost ground six times. By contrast, April was up in eight of the 11 test years.

    Academics would undoubtedly scoff at my relatively short 11-year sample period. They would be right in doing so. Nevertheless, in my experience, recent stock market data is more meaningful than older numbers. That said; keep in mind that the best strategies had losing years and vice versa. External economic and political events can move the market big time. Every year is unique.

    May 17 7:09 PM | Link | Comment!
  • 5 High Yielding Business Dev. Corps That Pay Monthly

    The overall economy is showing signs of perking up, but banks are still paying next to nothing in terms of interest on your savings. Consequently, dividend-paying stocks are getting a hard look from investors seeking steady income.

    If you're in that camp, Business Development Corporations (BDCS) are worth a look. Many are paying dividends equating to 8% to 11% yields (annualized returns on invested capital), and some are paying even more.

    About BDCs
    A BDC is a special type of corporation, created by Congress to encourage the flow of private equity to companies that are too large to borrow from banks, but too small to list on the stock market. These are mainly companies with annual revenues in the $10 million to $75 million range.

    Business Development Corporations pay high dividends because they don't pay federal income taxes if they follow the rules.

    Special Tax Treatment
    To qualify for the special tax treatment, BDCs must invest at least 70% of assets in private or thinly traded public corporations, must offer managerial assistance to their client companies, and most important from our perspective, BDCs must pay out at least 90% of taxable income as dividends to shareholders.

    More On BDCs
    BDCs make mostly short-term, unsecured loans in the $2 million to $50 million range. Also, they frequently take ownership positions (equity interest) in their client companies. Since they must pay out most of their profits to shareholders, BDCs must raise cash to fund expansion by selling more shares or via borrowing.

    BDCs went through hard times in 2008 and early 2009 when the economy tumbled. Most, however, have recovered, are financially strong, and well positioned to prosper if the economy strengthens this year, as many economists expect.

    Some Pay Monthly Dividends
    Many income investors prefer to receive monthly dividends, rather than the more common quarterly payouts. Of the 25 or so BDCs, here are the five that pay monthly.

    Full Circle Capital (FULL)
    A relatively new BDC (September 2010 IPO), Full Circle invests mainly in senior secured loans and, to a lesser extent, unsecured loans and equity securities issued by firms with annual revenues in the $3 million to $75 million range. Its loans typically range between $3 million and $10 million. Full circle pays dividends equating to an expected 11.6% yield.

    Gladstone Capital (GLAD)
    Offers mostly senior loans in the $3 million to $15 million range to small and medium sized businesses. Pays a 10.2% yield.

    Gladstone Investment (GAIN)
    Makes debt and equity investments ranging from $3 million to $20 million in small and mid-sized private businesses to facilitate acquisitions, changes in control and recapitalizations. Gladstone Investment makes riskier loans than Gladstone Capital, and may also take direct equity positions in its client companies. Pays a 7.7% yield.

    Main Street Capital (MAIN)
    Provides $2 million to $15 million of long-term debt and equity capital to companies with revenues in the $10 million to $100 million range to support management buyouts, recapitalizations and acquisitions. Pays a 6.9% yield.

    Prospect Capital (PSEC)
    Lends to and invests between $5 million and $50 million in private and micro-cap public businesses. Pays an 11.1% yield.

    The estimated dividend yields that I listed assume that each BDC will continue paying the same amount over the next 12-months. If the economy continues to strengthen, they should be able to maintain, or even increase their current payouts.

    Not A Slam Dunk
    Dividend yields, of course, aren't the whole story. Your total return on any stock is comprised of the dividends received plus or minus any share price changes. Thus, a share price drop could put you in the negative column despite the high dividends. In terms of total returns over the next three to six months, Main Street Capital and Prospect Capital are my top choices.

    Those are just my guesses, of course. As always, you should do your own due diligence. The more you know about your stocks, the better your results.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Feb 29 11:40 AM | Link | Comment!
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