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Real Estate Investment
High Dividend Property REITs
With the economy gaining strength, this
might be a good time to consider investing in commercial real estate.
You can do that via real estate investment trusts (REITs).
REITs trade like regular stocks, but they
don’t pay U.S. federal income taxes as long as they pay out at least 90%
of their taxable income to shareholders. On the downside, REIT dividends
are mostly taxed as regular income instead of the lower 15% capital
gains rate. So it’s best to keep REITs in tax-sheltered accounts.
There are two basic types of REITs:
Property REITs and mortgage REITs.
Property REITs own commercial real estate
properties such as apartment complexes, office buildings, or shopping
centers. Mortgage REITs don’t own properties; instead they invest in
mortgages backed by real estate, typically single-family residential
properties. Today, we’ll focus on property REITs.
Property REITs provide the customary
management services associated with leasing properties such as apartment
buildings, shopping centers and office buildings. But they can’t operate
properties requiring a high degree of personal service such as hotels
and healthcare facilities. Instead, they must lease those properties out
to third-party operators.
You can use the free, easy-to-use screener at FINVIZ.com to find REITs.
Start by going to the FINVIZ homepage (finviz.com)
and then selecting Screener. FINVIZ calls its selection criteria
“filters.” On the Filters bar, select “All” to display all of the
available filters. Use the associated dropdown menus to select the
desired filter values.
Most property REITs specialize in one of these property categories:
retail, healthcare, lodging (hotels, motels, etc.), industrial, office,
or mixed industrial/office. Diversified REITs own properties in multiple
FINVIZ allows you to search for REITs by
those categories. Start by using the screener’s Industry menu to select
a category such as “REIT- Retail.”
Dividend yields are analogous to the interest rate on a savings account.
For a stock, your yield is the dividends you receive over a year divided
by the price that you paid for the stock. So your yield would be 10% if
you received $1 per share of dividends from a stock that cost you $10
per share. Currently, most property REITs are paying dividends equating
to 3% to 7% yields.
Use the Dividend Yield menu to define your
minimum acceptable yield. I specified “Over 4%.”
Thanks to the huge trading commissions that they generate, institutional
investors such as mutual funds have access to information that you and I
never see. Thus, it makes sense to stick with stocks that the big money
likes. Institutional ownership measures the percentage of shares held by
these savvy players.
Require “over 40%” Institutional Ownership.
Not Too Cheap
Cheap stocks get that way because many investors see problems ahead.
Whether they are right or wrong, low trading prices signal added risk,
which you don’t need.
For Price, specify “over $5.”
FINVIZ tabulates stock analyst buy/sell ratings into these categories:
strong buy, buy, hold, sell, and strong sell. If anything, analysts tend
to be overoptimistic. To be on the safe side, pass up stocks that the
analysts are avoiding.
Require “Buy or Better” for Analyst
For REITs, or almost every other category of stocks, the best candidates
are those expected to grow earnings over the next few years.
Because property owners must deduct
non-cash depreciation expenses when calculating earnings, even if the
property is, in fact, appreciating in value, reported income is
unrealistically reduced by those charges and doesn’t measure the actual
cash flow generated by the properties. For that reason, the REIT trade
association created a measure called “funds from operations” (FFO),
which reflects the actual cash profits generated by a REIT's operations.
Although property REITs typically report both net income and FFO, the
analyst’ earnings estimates that you see on financial sites for REITs
are typically FFO per share estimates rather than earnings per share.
Use the “EPS Growth Next Five Years” menu
to select “over 10%.”
Stocks tend to move in trends. That is, as stock that has been steadily
moving up is likely to continue in that direction, and vice-versa. Thus,
your best candidates are those that are trending up.
Comparing a stock’s share price to its
moving average (average closing price over a specified number of days)
will tell you which way a stock is moving. Uptrending stocks are trading
above their moving averages, while downtrending stocks are trading
below. The 200-day moving average measures a stock’s long-term price
Use the “200-Day Simple Moving Average”
menu and specify “Price Above” to limit you list to uptrending REITs.
My screen turned up the following REIT
here to see what the screen turns up today (Remember to use the
Industry dropdown menu to separately select all of the individual REIT
• Duke Realty (DRE), 4.8% yield.
• One Liberty
Properties (OLP), 7.1% yield.
• Chatham Lodging Trust (CLDT), 5.8% yield.
Lodging Trust (CHSP), 5.0% yield.
Hospitality Trust (HT)
Retail Opportunity Investments (ROIC), 4.0% yield.
Realty Investors (WRI), 4.5% yield.
Please note that the REIT categories listed
by the FINVIZ screener are frequently wrong. You can find out a REIT’s
business by checking its profile on Yahoo! (finance.yahoo.com).
As with any screen, consider the REITs
listed to be research candidates, not a buy list. The more you know
about your stocks, the better your results.