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%.
Earnings for All
- 35 Ways to Earn Up to 11% on Your Money
- Short-Term Accounts: 1%-2%
- Muncipal Bonds: 2%-3%
- Investment-Grade Bonds: 3%-4%
- Foreign Bonds: 3%-5%
- High-Yield bonds: 3%-6%
- Dividend-Paying Stocks: 4%-6%
- Real-Estate Investment Trusts: 4%-9%
- Closed-End Funds: 4%-9%
- Master Limited Partnerships: 8%-11%
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.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
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.
-
Top Tech Gifts to Grab at Walmart Before ChristmasBig savings on Apple, Bose, HP, Vizio and more while there's still time to shop.
-
AI Appliances Aren’t Exciting Buyers…YetThe Kiplinger Letter Artificial intelligence is being embedded into all sorts of appliances. Now sellers need to get customers to care about AI-powered laundry.
-
Ask the Editor: IRAs, 401(k)s and RMDsAsk the Editor In this week's Ask the Editor Q&A, Joy Taylor answers questions on IRAs, 401(k)s and required minimum distributions
-
I Hear REITs Are One of the Best Ways To Get Income From Investing, Especially in Retirement. Should I Buy Them?We ask a financial expert for advice.
-
Should You Buy These ETFs Before the Fed Cuts Rates?The Fed is expected to cut the federal funds rate at the December Fed meeting, and investors should consider these ETFs as interest rates head lower.
-
Investing Moves to Make at the Start of the YearAfter another big year for stocks in 2024, investors may want to diversify in 2025. Here are five portfolio moves to make at the start of the year.
-
Smart Ways to Invest Your Money This YearFollowing a red-hot run for the equities market, folks are looking for smart ways to invest this year. Stocks, bonds and CDs all have something to offer in 2024.
-
Vanguard's New International Fund Targets Dividend GrowthInvestors may be skittish about buying international stocks, but this new Vanguard fund that targets stable dividend growers could ease their minds.
-
Best 401(k) Investments: Where to InvestKnowing where to find the best 401(k) investments to put your money can be difficult. Here, we rank 10 of the largest retirement funds.
-
Stock Market Today: Dow Soars 511 Points After McDonald's EarningsAll three indexes notched impressive gains Monday ahead of a jam-packed week on Wall Street.
-
7 Best Stocks to Gift Your GrandchildrenThe best stocks to give your grandchildren have certain qualities in common.
