Exchange traded fund investors have piled into dividend-generating investments after a year of high market volatility and low fixed-income yields, but there are other options available. For instance, real estate investment trusts, or REITs, also offer decent income streams.
REITs are securities that trade like stocks on major exchanges. The investments hold physical properties that generate revenue from rent payments, or REITs may be mortgage based, which means they hold property mortgages through either loaning money for mortgages or purchasing existing mortgages and other mortgage securities. Hybrid REITs hold both mortgages and physical properties.
The companies generate revenue from rent collected on properties. REITs then pay out a chunk of their net income to shareholders through dividends in order to qualify for federal tax breaks.
“REITs afford retail investors the ability to participate in a traditionally illiquid asset class–real estate–and receive stocklike returns with bondlike income streams,” according to Morningstar analyst Abraham Bailin. “These benefits come in addition to real estate’s ability to serve as an inflationary hedge through its asset appreciation and rising rents.”
Since the financial crisis, new issues of commercial mortgage REITs have become less risky, some industry experts argued.
Some believe that newer REITs operate more prudently than predecessors and offer greater transparency, reports Jennifer Popovec for NuWire Investor. Specifically, the REITs operate with lower leverage, stay away from cross collateratlization and lend to lower loan-to-values.
“Without question we’ve seen better disclosure coming out of mortgage REITs since 2008,” says Stephen Laws, an analyst with Deutsche Bank Securities Inc, said in the article. “It’s a welcome change, and I think that’s a trend we’re going to continue to see. The shareholders like that additional disclosure because it makes it easier to evaluate risk and reward. In fact, the added disclosure has made traditional REIT investors more comfortable with mortgage REITs, and it has brought in a new segment of investors.”
“All of these things amplified the risk to shareholders, and you could make the simple case that commercial mortgage REITs today operate at materially lower risk levels than old mortgage REITs,” Boyd Fellows, president and director of Starwood Property Trust, said. “I don’t think the yields the old REITs were achieving were any higher, but we’re now doing it at dramatically lower leverage levels and risk.”
- ALPS ETF Trust Cohen & Steers Global Realty Majors ETF (NYSEArca: GRI)
- First Trust S&P REIT Index Fund (NYSEArca: FRI)
- Focus Morningstar Real Estate Index ETF (NYSEArca: FRL)
- Index IQ US Real Estate Small Cap ETF (NYSEArca: ROOF)
- iShares FTSE EPRA/NAREIT Europe Index Fund (NYSEArca: IFEU)
- iShares FTSE EPRA/NAREIT North America Index Fund (NYSEArca: IFNA)
- iShares FTSE EPRA/NAREIT Global Real Estate ex-U.S. Index Fund (NYSEArca: IFGL)
- iShares FTSE NAREIT Real Estate 50 Index Fund (NYSEArca: FTY)
- iShares FTSE NAREIT Mortgage PLUS Capped Index Fund (NYSEArca: REM)
- iShares FTSE NAREIT Residential PLUS Capped Index Fund (NYSEArca: REZ)
- iShares FTSE NAREIT Industrial/Office Capped Index Fund (NYSEArca: FNIQ)
- iShares FTSE NAREIT Retail Capped Index Fund (NYSEArca: RTL)
- iShares S&P Developed ex-U.S. Property Index Fund (NYSEArca: WPS)
- iShares Trust Dow Jones U.S. Real Estate Index Fund (NYSEArca: IYR)
- iShares Trust Cohen & Steers Realty Majors Index Fund (NYSEArca: ICF)
- Market Vectors Mortgage REIT Income ETF (NYSEArca: MORT)
- PowerShares Active U.S. Real Estate Fund (NYSEArca: PSR)
- PowerShares KBW Premium Yield Equity REIT Portfolio (NYSEArca: KBWY)
- Schwab U.S. REIT ETF (NYSEArca: SCHH)
- SPDR Dow Jones REIT ETF (NYSEArca: RWR)
- Vanguard REIT ETF (NYSEArca: VNQ)
- Wilshire US REIT ETF (NYSEArca: WREI)
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.