One of the biggest reasons, if not the biggest reason, behind investors' affinity for real estate investment trusts (REITs) is the dividends. While REITs are known as a premier destination for income investors, not all dividend exchange-traded funds feature significant allocations to this asset class.
Dividends And REITs
“All but three of the 97 Real Estate companies in the S&P 1500 index paid a dividend as of the end of the third quarter of 2016. In particular, mid- and small-cap companies sport an above-average yield. Real Estate companies in the S&P 400 and 600 indices had a yield of 4.0 percent and 4.3 percent, respectively, higher than the 1.6 percent and 1.3 percent yields for the broader indices,” said CFRA Research in a note out Tuesday.
The Vanguard Dividend Appreciation ETF (NYSE: VIG), the largest U.S. dividend ETF, features no exposure to REITs. VIG only allocates eight percent of its weight to financial services, the sector from which real estate recently separated. Three other sectors, industrials, consumer discretionary and staples, command larger chunks of VIG's lineup than do financials.
Looking Beyond Large-Cap Dividend ETFs
Investors do not have to focus on large-cap dividend ETFs to gain exposure to REITs. For example, the WisdomTree MidCap Dividend Fund (ETF) (NYSE: DON), one of the best-performing mid-cap funds over the past decade, active or passive, features solid real estate exposure.
“The $2 billion product has a 16 percent stake in the new GICS sector, second only to consumer discretionary (18 percent of assets). Real estate holdings in the firm's proprietary index DON tracks include Senior Housing Properties (SNH) and VEREIT (VER). DHS has a 2.4 percent dividend yield,” said CFRA.
Recently highlighted in this space, the PowerShares S&P 500 High Dividend Low Volatility Portfolio (PowerShares Exchange-Traded Fund Trust II (NYSE: SPHD)) is another dividend ETF with significant real estate exposure.
PHD “which combines dividend yield and low risk factors, has a 14 percent weighting in real estate. Here too, the sector is the second largest behind utilities (18 percent of assets). Host Hotels & Resorts (HST) and HCP are among the ETF's top-10 holdings. SPHD has a 3.4 percent dividend yield,” noted CFRA.
Like DON, SPHD pays a monthly dividend. CFRA has a marketweight rating on DON and an overweight rating on SPHD.
Disclosure: Todd Shriber owns shares of SPHD.
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