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

Many utilities offer hefty dividend yields, attractive fundamentals, and promising long-term growth prospects. As such, trying to narrow the huge pool of potential candidates down to just a select few investment ideas can be both difficult and time-consuming. Fortunately for you, we've already devoted many hours to just this task.

We conducted a comprehensive review and analysis of many of the world's leading utilities. After evaluating each of them on a number of quantitative and qualitative factors, we arrived at a select group of four finalists. This group includes two well known homegrown companies, as well as two foreign-based utilities that operate in some of the world's most promising regions. We'll dedicate the remainder of today's report to in-depth profiles of each of these standouts.

REITs: The Basics
As you may know, REITs, shorthand for "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 these spaces to individuals or businesses. Some REITs also earn interest on real estate securities, such as mortgage bonds. Other REITs earn their keep by simply funding various real estate ventures.

Most investors buy REITs for their rich dividends. The average diversified property REIT offers an annual dividend yield of nearly 6.0%, more than twice the average 2.4% 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, 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.

But even after the extra taxes, the yields most REITs pay are far higher than the taxable equivalent yield you'll get from most other common stocks. And savvy investors can avoid these extra taxes entirely by holding REITs in a tax-advantaged account like a Roth IRA.

(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 +16.7% per year from 2003 to the end of 2007, outpacing the S&P 500's +12.8% annual return. Most analysts expect REITs to continue delivering steady earnings growth during the next few years. Combine those earnings gains with solid dividend yields and steady dividend growth, and REITs should continue to be a popular choice for investors.

In fact, studies have shown portfolios containing REITs tend to outperform those without 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 nothing less than 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 $54,800 difference if you assume an initial investment of $10,000. 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 it 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 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, 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 of purchasing REITs. It is true that some REITs have been beaten up, but in bad times the market tends to overreact and punish all stocks in a sector indiscriminately. As a result, many REITs are now trading at attractively low valuations -- and with higher yields since yield and share price always move inversely. The key to finding good REITs in this environment, as we discuss later, is choosing the correct type of property.

(2.)  Buy the Stock, Not the Yield

Most people buy REITs for their rich dividend yields. But investors who focus exclusively on a stock's yield could be making a huge mistake. That's because corporate dividend payments are by no means guaranteed. Even though a company might be paying a healthy 10% dividend yield now, it might not be able to sustain such a rich payout if its business model isn't solid. Since companies usually extract dividend cash from earnings, payouts could be slashed if profits are pinched.

For example, U.S. automakers were traditionally known for their handsome yields. But once the industry stopped turning a profit, auto company dividends began to evaporate. Investors that bought Ford (NYSE: F) lost their dividend in 2006. After one dividend cut, General Motors (NYSE: GM) finally suspended its dividend in the summer of 2008.

Investors who buy a REIT based on its high dividend yield, without gauging its earnings prospects, could be setting themselves up for a similar disappointment. The most profitable stocks are those that generate the greatest total return: That is, 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 dividend reinvestment plans. These plans, also called DRIPs, allow investors to reinvest dividend payments to buy the security without incurring steep transaction fees. But even if you can find a REIT with a reasonable price, a good dividend and a DRIP, one additional factor is paramount, and that's property type. It's important to know what exactly the REIT owns.

Property Type is Key
Everyone knows the old line about the three things that matter most in real estate: Location, location and location. But when choosing a REIT, there are a few more items for investors to consider. 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 each REIT owns.

Many REITs specialize in a property type, such as offices, apartments, warehouses, regional malls, shopping centers, hotels or healthcare centers. Others, like Duke Realty (NYSE: DRE), own a mix of retail, industrial, and office property. A few others invest in specialty properties, such as Entertainment Properties (NYSE: EPR), which owns movie theatres.

Each real estate sector is affected by different economic factors. If the job market is booming, for instance, then office REITs could be attractive because more people are working and more space is needed to accommodate them. If consumer spending is on the decline, then a shopping center REIT like Regency Centers (NYSE: REG) might find itself headed for challenging times as retailers feel the pinch.

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

Thanks for reading today's special report -- Real Estate You Can Trust.

Good investing!

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

StreetAuthority LLC
839-K Quince Orchard Blvd. 
Gaithersburg, MD 20878-1614

Please note that StreetAuthority, LLC is not a registered investment firm or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. StreetAuthority does not purport to tell or suggest which investment securities members or readers should buy or sell for themselves. Site users should always conduct their own research and due diligence and obtain professional advice before making any investment decision. StreetAuthority will not be liable for any loss or damage caused by a reader's reliance on information obtained in this newsletter or on our web site. Our readers are solely responsible for their own investment decisions.

The information contained herein does not constitute a representation by the publisher or a solicitation for the purchase or sale of securities. Our opinions and analyses are based on sources believed to be reliable and are written in good faith, but no representation or warranty, expressed or implied, is made as to their accuracy or completeness. All information contained in this report should be independently verified with the companies mentioned. The editor and publisher are not responsible for errors or omissions.