A Real Estate Play That Pays

Lavish yields on preferred stocks of real estate trusts are too tempting to ignore.

A shrinking economy and frozen credit markets are a lethal combination for real estate investment trusts. The Dow Jones Wilshire REIT index lost 34% over the past year through February 6, as investors concluded that these toxic conditions would force many REITs to pare back generous common-stock dividends. REIT preferred shares did just as poorly.

Nevertheless, preferred issues from some of the stronger players are worth a look. They yield 9% to 12%, and their dividends are shielded by an added layer of protection: A REIT would have to eliminate its common dividend before it could reduce its preferred payout. "The reality is that most REITs aren't even going to cut their common dividend," says Jay Leupp, who runs Grubb & Ellis AGA Realty Income fund and invests 80% of its assets in REIT preferreds.

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Contributing Editor, Kiplinger's Personal Finance