Robust dividends lift a REIT fund’s total return.
Rising interest rates may be prompting real estate investment trust funds to fall, but there’s good reason to hold on to them: dividends. Real estate investment trusts are required to distribute at least 90 percent of their taxable income as dividends to shareholders each year, says Jeremy Walter, portfolio analyst at Halberstadt Financial Consultants in Princeton, New Jersey. The income from healthy dividends — sometimes as much as 8 percent or more — can lift the overall REIT fund’s return, even when prices fall. That’s in addition to the potential for future asset value growth and positive cash flow, Walter says. Experts suggest looking at the following REIT funds for above-average, income-producing yields.
Vanguard Real Estate ETF (ticker: VNQ)
At 4.8 percent, the VNQ’s relatively high yield isn’t the only factor investors should consider. Total return with capital gains and losses is another. “REITs are currently experiencing a correction in a long-term bull market,” Walter says. “The ETFs that were leaders or showed relative strength prior to major corrections often rebound the fastest.” Large-cap REITs like this one then become extra attractive because of their ability to benefit from high average trading volume, large net assets and low expense ratios, he says. There are higher-yielding REIT funds, but VNQ sticks with high-quality holdings, such as Simon Property Group (SPG), Prologis (PLD), Equinix (EQIX) and Public Storage (PSA).
Cohen & Steers Quality Income Realty Fund (RQI)
Walter likes this closed-end fund for its dividend yield of about 8 percent relative to its value price of about $11.43 a share. RQI’s high dividend is “especially important now” since central banks globally have “essentially driven the yields on competing assets to near zero, and therefore limited price potential for many assets,” Walter says. His company is predicting an upside target price on the fund of $17.50 within a couple of years. Plus, the dividend is paid monthly, which will please investors looking for a steady stream of income, Walter says. The fund’s largest holdings are also in the apartment sector, which Walter expects to benefit from increasing demand for housing.
Vanguard Global ex-US Real Estate ETF (VNQI)
Because almost all REIT ETFs are “highly correlated” to the broad Dow Jones REIT index — and its prices fall when interest rates rise — the strongest REIT options right now are in the international space, says Dan Stewart, president of Revere Asset Management in Dallas. With a current yield of 3.9 percent, VNQI is also up overall about 10.7 percent over the past year, he adds, and with both measures above average, the fund has an advantage over other REITs. Top holdings include China-based Sun Hung Kai Properties and Japan’s largest homebuilder Daiwa House Industry Co. and one of the country’s biggest developers, Mitsubishi Estate Co.
iShares Global REIT ETF (REET)
This REIT ETF’s international exposure makes it an attractive longer-term hold, along with its yield of 4 percent, says Todd Sensing, a certified financial planner, former REIT hedge fund manager and founder of FamilyVest in Destin, Florida. He suggests staying away from REIT funds with holdings in mall and retail and instead prefers those in the health care and office sectors because these REITs maintain strong balance sheets. “In general, I see valuations at fair value and would not be increasing exposure at this point,” he says.
Global X Super Dividend REIT ETF (SRET)
By tracking the Solactive Global SuperDividend Index, this fund offers 75 percent U.S. exposure and 25 percent international exposure across many subsectors, Stewart says. Plus, there’s SRET’s monthly dividend of nearly 8 percent and accessible share price of $14.78. SRET makes “a great, large-core position,” he says. Paired with VNQI, this fund could provide more “tactical” growth because “it is always total return that counts.” The fund’s portfolio consists of the 30 highest-yielding REITs, says Sensing, adding: “Seeking high yield in individual names can be a disaster, but SRET’s diversified approach will help mitigate some of this risk.” Sensing notes SRET isn’t as sensitive to currency fluctuations as other global funds.
PowerShares KBW Premium Yield Equity REIT ETF (KBWY)
With an 8.3 percent yield, this is among the highest-yielding REIT ETFs available now, says Robert Drach, founder of Drach Advisors in Tallahassee, Florida. While most investors will skew toward the large-cap names, KBWY serves as a great vehicle for diversification and exposure to about 30 high-yielding, smaller REITs. Paired with funds such as Schwab U.S. REIT ETF (SCHH) and VNQI, investors can achieve a global, low-cost REIT portfolio and potentially hedge the cap on gains posed by the current “tough” environment, Drach says.
Create your own REIT fund.
Savvy investors can create their own REIT fund using high-yield REITs that invest in health care, government, commercial, infrastructure and storage real estate, Stewart says. “Following the conventional wisdom will get you the average REIT yield and return; if you’re willing to put in a little work, you can do better than average,” he says. That’s because you can eliminate a number of “mediocre stocks” an ETF is required to hold. Most ETFs hold 50 or more stocks, whereas you only need 20 to 25 for adequate diversification, he says. For investment ideas, look at the top 10 holdings of REIT funds in each sector and choose those with the best price and yield.
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6 REIT Funds to Buy With Robust Dividends originally appeared on usnews.com
