The REITs of Steel

TheStreet.com

NEW YORK (TheStreet) -- I've been meaning to take my younger kids to see Man of Steel, the latest Warner Brothers movie that is dominating the box office, with nearly $400 million in sales in 12 days (since the release). As the first Superman sequel in seven years, Man of Steel has become a global box-office smash that has taken the fictional super hero from a 1933 comic book character to a legendary worldwide icon, with powers used to benefit all of humanity.

For dividend investors, there is another planet we call REIT-dom and these characters, real estate investment trusts, have powers that are inspired by the forces of nature we call dividends. Now it's true that REITs have been around for more than 50 years, so the success of the most powerful asset sector is rooted in the sustainability of the stalwart forces we call income.

Much like Clark Kent (also a journalist like the Intelligent REIT Investor), REITs enjoy extraordinary powers that are unique compared to any other security. As a force of law, dividends must payout 90% of their taxable income in the form of dividends and that special power has enabled investors to benefit from one of the most supernatural forces on the planet: Compounding. As Albert Einstein once said, "Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it."

So if compounded interest is the eighth wonder of the world, REITs could be the ninth.

The compounding effect for a REIT simply allows for a dividend investor to turn a small amount of money into a substantial sum and the longer the compounding effect, the more profits you earn, over time. Because REITs pay out considerably higher dividends, vs. other securities, the compounding principle allows an investor to grow his or her portfolio and achieve magnified results and exceptional performance.

Owning REITs, which grant you the special power to compound dividends, is important to building a portfolio that is durable and sustainable. The consistency in dividend performance is a true measure of risk control; conversely, being able to maintain and grow dividends is the mark of an intelligent investor. As explained by economist and value investor Ben Graham (in The Intelligent Investor):
"One of the most persuasive tests of high-quality is an uninterrupted record of dividend payments going back over many years. We think that a record of continuous dividend payments for the last 20 years or more is an important plus factor in the company's quality rating."

The REITs of Steel

Graham also believed that "the defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition." Graham believed that finding companies with repeatable dividend performance could be used to one's "advantage and distinguish the differences in an investment operation and a speculative one."

The arch enemy for most dividend stocks today: The "fear of rising interest rates." As we found out last week, the mere suggestion that interest rates will soon begin to rise is like offering kryptonite to Superman.

Yet, the kryptonite in REIT-dom is simply a mirage. Mr. Market seems to think that REITs trade like bonds and the fear of rising interest rates has driven alien forces into the land of milk and honey. This is not true.

At some point, kryptonite (fear) will appear and that's why it's important to consider investing in the REITs of Steel. Specifically, these "best in class" equity REITs that have demonstrated a record of durability and a disciplined policy of paying and increasing dividends: Kimco Realty , Ventas , HCP , Realty Income , Simon Property Group , Tanger Factory Outlets , Taubman Centers , WP Carey , Digital Realty and Essex Property Trust .

REITs should be a core part of any investment portfolio and unless you are Warren Buffett or Bill Gates, it is hard to get broad access to real estate ownership by purchasing individual shopping centers or office buildings. By owning REITs, an investor is able to gain access to a very diverse group of asset sectors and geographies. Most importantly, REITs enable investors to reap the rewards of the most powerful force on the planet we call compounding.

To learn more about the power of compounding and my "sleep well at night" portfolio, click here to subscribe to the The Intelligent REIT Investor newsletter.

At the time of publication, Thomas was long O.

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

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