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REITs

5 Ways to Earn 4% to 9% from Real-Estate Investment Trusts

Real estate investment trusts had a great run. They're discounted now, and still hold promise.

Illustration by Mathieu Persan

REITs were on fire coming out of the Great Recession, as the recovering economy and rock-bottom interest rates boosted prices of the commercial, industrial and residential real estate that the companies own and manage. But the jump in longer-term interest rates early this year hit REITs hard. The average real estate mutual fund is down 8.3% in 2018. That makes some REITs compelling bargains, with yields in the range of 4% to 9%.

The risks: Higher interest rates create competition for REITs' dividend payments and make it more expensive for REIT managers to borrow to buy new properties. But if the backdrop for rising rates is a strong economy, that should underpin property rents and thus REIT income and dividends. And if inflation rises with the economy, real estate's role as an inflation hedge could lure investors.The prospects for REITs vary depending on the markets in which they operate, so it pays to be choosy–or well diversified. Some retail-focused REITs are reeling from the shift away from brick-and-mortar sales to online shopping, for example.

How to invest: The simplest, lowest-cost route is to own an index fund that holds a broadly diversified portfolio of REITs. Vanguard Real Estate Index ETF (VNQ, $74, 3.8%), like its mutual fund cousin (VGSIX), owns shares of 185 REITs. The ETF has gained an average of 5.6% a year over the past 10 years, beating the 5.2% return of the average real estate fund. Fidelity Real Estate Income (FRIFX, 4.4%) mixes REIT shares with real estate-related corporate bonds, preferred shares and mortgage-backed securities. The fund has gained an annualized 7.8% over the past 10 years.

Among individual REITs, Realty Income (O, $50, 5.3%) is one of the Kip Dividend 15. Although most of Realty's 5,200 properties are retail stores, its occupancy rate is 98%. The firm has shied away from malls, focusing instead on free-standing buildings that house tenants such as drugstores, convenience stores and fitness facilities. We also like Monmouth Real Estate Investment (MNR, $15, 4.5%). It's an e-commerce play: 60% of revenue comes from properties occupied by package delivery titan FedEx.

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Investors willing to accept higher risk to get higher yields might consider REITs that invest in commercial or residential mortgages. One idea: iShares Mortgage Real Estate Capped (REM, $42, 8.5%), which owns stakes in some of the biggest mortgage REIT funds, including Annaly Capital Management and Starwood Property Trust.