Earn Up to 6% Yield by Investing in REITs

Since real estate companies borrow money to finance their purchases, rising rates could squeeze their profit margins.

Owning everything from office buildings to self-storage facilities, REITs rake in rents and must pay at least 90% of their taxable income to shareholders. As long as they can keep raising rents and dividend payments, the stocks should fare well. Indeed, REITs’ underlying properties should post a 4.5% average gain in operating income this year, fueling dividend growth in the “high single-digit” range, says investment firm Lazard.

Earnings for All

Risks to your money. Rising interest rates could hurt REITs, which typically take on a lot of debt to buy properties. Steeper rates would increase their financing costs and could depress real estate values. Some types of REITs are pricey, and some may not be able to hike their dividends.

Hire a pro. Yielding 2.4%, T. Rowe Price Real Estate (TRREX (opens in new tab)) emphasizes big, high-quality REITs. Although its yield is relatively low, it earns high marks for consistency and avoiding big losses in down markets, says Morningstar. Vanguard REIT ETF (VNQ (opens in new tab), $84), which tracks an index of REIT stocks, costs just 0.12% in annual fees and yields 4.1%. (All prices and returns are as of March 31.)

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Do it yourself. In the residential space, AvalonBay Communities (AVB (opens in new tab), $190, 2.8%) looks appealing. Managing more than 83,000 apartment units in 11 states and Washington, D.C., the firm reported a 5.4% year-over-year increase in rental revenues in the fourth quarter of 2015. It’s also expanding steadily, with acquisitions and new developments, and is “firing on all cylinders,” says Credit Suisse, which expects the stock to hit $200 in the next 12 months.

Crown Castle International (CCI (opens in new tab), $87, 4.0%), a REIT that owns cell-phone towers, is benefiting as wireless networks expand. Tenants are major telecom firms that typically sign long-term leases with Crown. With its tower network growing steadily, the REIT aims to hike its dividend by 6% to 7% annually over the next few years.

Also attractive is EPR Properties (EPR (opens in new tab), $67, 5.8%), a REIT that focuses on recreational venues, such as movie theaters and golf courses, along with charter schools and day-care centers. With revenues rising, the REIT should generate annual returns, including dividends, in the “mid teens,” says Matthew Berler, comanager of the Osterweis Fund.

Daren Fonda
Senior Associate Editor, Kiplinger's Personal Finance
Daren joined Kiplinger in July 2015 after spending more than 20 years in New York City as a business and financial writer. He spent seven years at Time magazine and joined SmartMoney in 2007, where he wrote about investing and contributed car reviews to the magazine. Daren also worked as a writer in the fund industry for Janus Capital and Fidelity Investments and has been licensed as a Series 7 securities representative.