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REITs Ready To Rock In 2011?

|Includes:AGNC Investment Corp. (AGNC), DDR, VNO
Throughout the financial crisis, it seemed like the experts and pundits kept wondering what the next shoe to drop was going to be and it always seemed as the arrows kept pointing to real estate investment trusts. No doubt, the financial crisis adversely impacted REITs. There were bankruptcies and dividend cuts, but the epic collapse of the industry that some called for never really materialized.

Fortunately, 2010 brought better things for REITs as many individual names in the group and several REIT-specific ETFs managed to out perform the S&P 500, perhaps showing that where there is yield, investors will flock.

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So for the most part, REITs made it through 2010 with flying colors, but does the outlook for 2011 portend more big things to come? Quite possibly and it just might be time for income investors who took a break from REITs over the past two years to reevaluate the group and consider adding one or two to their portfolios.

There could be good news awaiting dividend hunters with REITs this year. In a 2010 interview with, Tim Pire, managing director at Heitman, said investors will continue to be attracted to REITs because in this environment of low interest rates, yield is hard to come by.

"REIT dividend yields are going to grow. They have to," Pire said in the invterview.

With interest rates likely to remain low through at least the first half of this year, income-starved investors can capture some strong dividends for at least a few months and maybe longer, assuming the Federal Reserve holds off on raising rates. In fact, low interest rates make mortgage REITs worth a look because firms like American Capital Agency (Nasdaq: AGNC) make money on the spread between low-interest short-term borrowing and purchasing high-interest long-term securities, which leads to solid profits given the current conditions, according to the Bedford Report. American Capital currently yields a whopping 19%.

The dividend news flow for REITs has also been positive to start 2011. Just this week, Developers Diversified Realty (NYSE: DDR) announced it would double its payout while Vornado Realty Trust (NYSE: VNO) raised its dividend 6%. Those headlines aren't necessarily guarantees of more dividend increases by REITs, but sometimes with dividend hikes in a specific sector, when it rains it pours.

There are cautionary tales though when it comes to REITs in 2011, namely investors should focus on well-established names and not rush into what may look like the next high-flier from the IPO market. The eight REITs that completed IPOs in 2010 rose on average 1.9%, according to Bloomberg News.

That's a trend that may reverse course this year assuming investors really warm up to the sector in general, but for now, there are enough established REITs that look poised to return capital to shareholders that investors don't need to roll the dice on a newly public company. Bottom line: The darkest clouds for REITs have passed and with an improving economy as a backdrop, the group has plenty of potential to shine again in 2011.

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Stocks: AGNC, DDR, VNO