Real Estate You Can Trust:
Three High-Yielding REITs With Safe Dividends

REITs. No doubt you've heard about them. Maybe you've shied away from them because their fat dividends seemed too good to be true. Or maybe you already hold some REITs in your portfolio but want to identify which ones will provide you with the best long-term returns.

In this special report, we'll take a closer look at both the rewards and the risks associated with investing in these unique securities. We'll also bring you in-depth profiles of two individual REITs and one REIT fund that are poised to deliver market-beating returns in the years ahead.

As you may know, REITs, or real estate investment trusts, are dividend-paying securities that invest in real estate. Most REITs own land or buildings and make their money by renting this available space to individuals or businesses. Some REITs also earn interest on real estate securities, such as mortgage bonds. Meanwhile, others earn their keep by simply funding various real estate ventures.

Rich Yields
Most investors buy REITs for their rich dividends. The average diversified property REIT offers an annual dividend yield of roughly 5.0%, more than twice the average 1.8% yield paid out by members of the venerable S&P 500 Index.  That's money in your pocket.

Even better, the cash usually keeps coming in regardless of whether a particular REIT's share price goes up or down. That's because to preserve their unique tax advantage, REITs are required by law to pay out 90% of their income as dividends to shareholders. In return, REITs are not subject to corporate income tax.

On the downside, since REITs don't pay income taxes (most of the time), their dividends are usually fully taxable. In other words, the dividends you receive will be taxed as ordinary income, up to 35%. Most REIT dividends don't qualify for the reduced 15% dividend tax rate.

Even after the extra taxes, the yields paid out by most REITs is far higher than the taxable-equivalent yield paid by most other common stocks. In addition, by holding REITs in a tax-advantaged account, say a Roth IRA, savvy investors can avoid these extra taxes entirely.

(1.)  A Closer Look at REITs

Although their earnings growth tends to be a bit slower than average, this hasn't stopped REITs from posting above-average share price gains in recent years. In fact, REITs have returned a stunning +20% per year over the last five years, far outpacing the broader markets' annual gains. And looking ahead, most analysts still expect REITs to deliver steady earnings growth over the next few years. Combine those earnings gains with solid dividends yields and steady dividend growth, and REITs should continue to be a popular sector for investors.

In fact, studies have shown that portfolios containing REITs tend to outperform those without REITs over the long haul. One study compared the 30-year returns of portfolios that contain 10% REITs, 20% REITs, and no REITs. The results were astonishing. The 20% REIT portfolio beat the non-REIT portfolio by nearly half a percentage point a year. Although that might not seem like much, over the course of 30 years this adds up to an incredible $548,000 difference if you assume an initial investment of $100,000. And even the 10% REIT portfolio surpassed the non-REIT portfolio by a significant margin.

Reduced Portfolio Risk
Other studies have proven that adding REITs to a portfolio not only generates higher returns, but also helps reduce risk. That's because REITs generally do not move in tandem with the stock markets. As a result, REITs can provide you with an excellent tool to help diversify your portfolio and smooth out your overall returns.

Owning shares in a REIT is really just an economical way to purchase real estate. And as we all know, real estate has real value that investors can touch, feel, and understand. This tangible value, combined with the limited supply of high-quality real estate, make REITs one of the most stable investment alternatives around.

Buyer Beware
Despite their benefits, however, REITs are not without risk. Given the strong run up in REIT share prices over the past few years and the subsequent fall during the subprime crisis, many investors may be skeptical to purchase REITs at this point. It is true that some REITs are in bad shape for good reason, but the market tends to overreact and punish all stocks in a sector indiscriminately in bad times. As a result, many REITs are now trading at attractive valuations with higher yields (yield and share price move inversely). The key to finding quality REITs in this environment, as we discuss later, is property type.

(2.)  Buy the Stock, Not the Yield

Most people buy REITs for their rich dividend yields. However, investors who focus exclusively on a stock's yield could be making a huge mistake. After all, corporate dividend payments are by no means guaranteed. Even though a company might be paying out a healthy 10% dividend yield now, if the firm's business model isn't solid, then that exact same company might not be able to sustain its high payout in the years ahead. Since firms draw their dividend payments from earnings, payouts could be slashed if profits are pinched. Investors who buy a REIT exclusively for its high current dividend yield, without gauging its earnings prospects, may be in for a serious disappointment.

The most profitable stocks are those that generate the greatest total return. This includes both dividends and share price appreciation. If total returns are what you're after, then looking exclusively at yield would be a foolish, short-sighted strategy.

REITs with long track records of steady dividend and share price growth are your best bet. In addition, investors should look for companies that offer a dividend reinvestment plan (DRIP). These plans allow you to reinvest your dividend payments to buy the stock without incurring steep transaction fees. But one item is even more important for a REIT considering today's sagging housing market -- property type.

Property Type is Key
To get a feel for the income stream from which your dividend payouts are drawn, you should always pay close attention to the type of property that each REIT owns. Many REITs specialize in one property type, such as offices, apartments, warehouses, regional malls, shopping centers, hotels, or health-care centers. Meanwhile, others, like Duke Realty (NYSE: DRE), own a mix of retail, industrial, and office property. And finally, others invest in specialty properties, such as Entertainment Properties (NYSE: EPR), which owns movie theatres.

Each real estate sector is affected by different economic cycles. If the job market is booming, for instance, then office REITs could be attractive. As another example, if consumer spending is on the decline, then a shopping center REIT like Regency Centers (NYSE: REG) might find itself headed toward challenging times.

Property type can also tell you how predictable a stock's income stream might be. Thanks to the fact that they often require their tenants to sign 10-year leases, mall REITs usually generate more predictable income than apartment REITs, which tend to lease for periods of just one year at a time. Knowing the quality and diversity of its tenants will also give you a sense of the reliability of the REIT's income.

Larger, diversified or geographically dispersed REITs are less exposed to regional weakness and major economic cycles. These REITs tend to be more stable over the long haul. A company such as Equity Residential (NYSE: EQR), the world's largest publicly traded apartment REIT, owns apartments in various markets across the United States and is less sensitive to various local economic conditions. On the other hand, smaller, more specialized REITs often provide the greatest growth potential. A niche-player like SL Green Realty (NYSE: SLG), which owns offices solely in New York City, is highly leveraged for success if that particular market does well.

Selecting the Winners
Even after you know what to look for, finding the best REIT for your money can still be an overwhelming task. To assist you in the search process, our research staff has combed through the vast universe of publicly-traded REITs and REIT funds, pinpointing those with the greatest potential for above-average long-term returns. In doing so, we've paid close attention not just to each firm's dividend yield, but also to its property portfolio, its growth prospects, and its valuation level relative to that of its peers. After carefully screening hundreds of REITs, we've selected several that we believe offer the best profit potential. We have dedicated the remainder of today's report to an analysis of these three high-quality REITs.

(3.)  Our Top Three REITs

Even after you know what to look for, finding the best REIT for your money can still be an overwhelming task. To assist you in the search process, our research staff has combed through the vast universe of publicly-traded REITs and pinpointed those with the greatest potential for above-average long-term returns. In doing so, we've paid close attention not just to each firm's dividend yield, but also to its property portfolio, its growth prospects, and its valuation level relative to that of its peers. After carefully screening nearly 200 REITs, we've selected several that we believe offer the best long-term profit potential. We are going to dedicate the remainder of today's report to an analysis of these three high-quality REITs . . .

Thanks for reading today's special report -- Real Estate You Can Trust: Three High-Yielding REITs with Safe Dividends 

Good investing!

-- Research Staff
StreetAuthority.com
http://www.StreetAuthority.com

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