If you follow the insights of uber investor Warren Buffett or you're a reader of High-Yield Investing, then you already know that real estate is one of the hottest investments right now, because it provides the attractive combination of growth and income for a retirement savings portfolio.
Many people avoid these investments because of the risks and high costs in owning and maintaining real estate. But there is an easy way to gain entrance into the real estate market without the headaches that can come with being a landlord.
REITs are real estate investment companies that are responsible for managing a portfolio of real estate -- single-family homes, apartments or commercial properties. And because of their financial structure, REITs must distribute 90% or more of their taxable profits in the form of dividends in exchange for avoiding corporate income taxes. This allows investors to have a strong dividend income stream. The dividend income derived from REITS tends to be very stable, too. After all, REITs have a reliable source of income from the rent and transaction fees they collect monthly.
Out of 10,000 publicly traded companies, this REIT is one of only 104 stocks that have increased annual dividends for 23 or more consecutive years. The average annual total return to shareholders has been 13.3% during the past 20 years.
The REIT that caught my attention is National Retail Properties (NYSE: NNN).
This REIT acquires, owns, manages and develops retail properties in the United States. With 1,622 retail properties in its portfolio, its current occupancy is close to 98%, with more than 300 tenants in 36 industry classifications, including Barnes & Noble (NYSE: BKS), Best Buy (NYSE: BBY), CVS (NYSE: CVS), OfficeMax (NYSE: OMX), and the government-leased properties.
It is well diversified as it provides complete turnkey and built-to-suit development services. It invests in single-tenant retail properties generally subject to long-term, net leases.
Top Tenant Lines of Trade
A net lease shifts property-operating expenses such as maintenance, taxes, insurance and utilities over to the tenant. This significantly lowers National Retail's expenses and provides more stable net cash flow. The stock currently yields about 4.5% and chances are this will continue to rise.
In addition to its steady dividend, this REIT has shown impressive growth, up more than 40% in the past year, as you can see on the chart below.
On Feb. 7, National Retail announced quarterly earnings of 32 cents a share, a positive surprise of 18.5% above the consensus of 27 cents a share. It also provided annual 2013 funds from operation (FFO) guidance between $1.81 and $1.85 a share, slightly above the average analysts forecasts of $1.81 a share.
National Retail also looks attractively valued compared to the competition. Its trailing 12-month price-to-earnings (P/E) ratio is 36, way lower than the P/E of almost 73 for the peer group. Its price-to-book value ratio is 1.91, compared to the industry average of 2.47. Additionally, it return on assets is 4.7%, compared to an industry average of just 3.9%.
Risks to Consider: Be sure to consider National Retail's valuation, operation trends and exposure to the real estate market. The real estate market could experience another downturn, which could negatively affect National Retail's bottom line. In the current low-rate interest environment, yield-hungry investors may have bid up prices of higher dividend sources of yield and this includes REITs. If interest rates rise in the future, then this could negatively affect the price of many REITs.
Action to Take --> For investors looking for a steady flow of income with good growth potential, then National Retail Properties is worth a closer look. This is a good buy up to $40 a share. This stock could easily hit $45 during the next 12-18 months.