5 Stocks to Ride the Real Estate Rebound

High-quality real estate investment trusts will emerge from the recession stronger than ever.

Real estate investment trusts may be back from the abyss, but that doesn't mean they're back to normal. Between March 6, when the group bottomed, and May 8, the MSCI U.S. REIT index surged 63%, an indication that the worst may be over. Still, investors looking for the kind of steady, low-risk returns that used to be the sector's hallmark will be disappointed. Many top-quality REITs have been shoring up their battered balance sheets by cutting dividends and issuing new shares, which dilutes the value of existing shares. And even the most optimistic real estate outlook for the remainder of 2009 calls for falling rents, more tenant bankruptcies and diminishing property values.

REITs own all types of properties -- shopping malls, apartments, office buildings, self-storage facilities -- and make their money by collecting rents. By law, they must pay out 90% of their taxable income as dividends, making them good stocks for income-oriented investors. (Some REITs that invest only in mortgage securities are more akin to bond funds.)

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Contributing Editor, Kiplinger's Personal Finance