Build a Strong Portfolio With REITs: Opinion

TheStreet.com

NEW YORK (TheStreet) -- It's hard to argue REITs should not be in your core portfolio when the dividend-centric sector is crushing just about all other well known asset classes.

Year to date, all equity real estate investment trusts have returned over 15%, according to NAREIT, beating out the broader S&P 500 index (11.6%) and the Russell 2000 (9.2%).

Some of the REIT sectors have produced some extraordinary results including the freestanding, or triple-net, sector that has returned an average of 28.8% for the year to date. The health care sector has also had a remarkable run, returning around 23.7% in the same period, also according to NAREIT.

I'm not a gambler but I'm betting retail REITs will continue to outperform. Year-to-date the shopping center REITs have returned around 17.3% and the regional mall REITs have returned over 11% in April alone.

This week I'm attending the annual ReCon Las Vegas conference, where I plan to provide several exclusive CEO interviews for TheStreet. This global convention for shopping center professionals expects over 35,000 professionals projected, up 10% from last year.

Some of the REIT CEOs I plan to interview include those of Taubman Centers, Kimco Realty, Realty Income, National Retail Properties, Weingarten Realty Investors, Regency Centers, Federal Realty and Tanger Factory Outlets.


Why should REITs be a core asset in your investment portfolio?

"The essence of diversification is that combining assets whose returns follow different drivers can reduce your portfolio volatility without forcing you to accept lower returns," explained Brad Case, senior vice president with NAREIT. "The three liquid asset classes that respond to different return drivers are REIT stocks, non-REIT stocks and bonds. That's why those three assets, along with cash, are essential to any diversified portfolio."

Remember that part of the attraction to REITs is you are investing in "brick and mortar" but you are also investing in the management teams. You have the best of both worlds: exposure to diversified real estate as well as professional management. Based upon the confluence of financial market reforms and the continuing evolution of REITs as a coherent asset class, investors are beginning to gain more confidence.

In the "Handbook of Alternative Assets," Mark J.P. Anson explains:

"Real estate is not an alternative to stocks and bonds -- it is a fundamental asset class that should be included within every diversified portfolio. Equity, fixed income, cash, and real estate...are the basic asset classes that must be held within a diversified portfolio."

It's clear that some investors have long memories and some still grapple with the fact that commercial real estate was ravaged by the credit crisis along with every other asset class. However, the REIT evolution is unfolding and the data support the argument that REITs should be a core component for an investor's portfolio.

In the book "The Random Walk Guide to Investing," Burton G. Malkiel (Princeton) wrote:

"Basically, there are only four types of investment categories that you need to consider: cash, bonds, common stocks and real estate."


I write about REITs (to be honest, I preach REITs) and I have a high bias that the forced dividend-based asset class should be a core asset class (as opposed to an alternative) simply because of the dramatic shortage of quality yield in the marketplace. This biased attraction is driven by the fact that REITs have a highly efficient structure of paying out consistent and reliable dividend income (remember, REITs are forced to pay out at least 90% of taxable income).

In addition, real estate is one of the few gems that can protect your portfolio from the effects of inflation. No wonder I call them "Sleep Well at Night" (SWAN) investments.

Make sure to check out my videos on The Street later this week and make REITs part of your SWAN portfolio.

For more information on REITs, see my Web site.

At the time of publication the author had no position in any of the stocks mentioned.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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