Practical Investing: Why You Need REITs

Holding real estate trusts can add stability to your investments without reducing your returns.

Kathleen is an investment newbie who has started digging into financial statements to do a better job of analyzing stocks. But she was flummoxed when trying to assess a company that was similar to one I had written about in the May issue. When she sent me the symbol, I understood why. She wasn’t looking at an ordinary stock; she was looking at a real estate investment trust.

REITs are something of a hybrid. They trade like stocks, but their dividend yields can approach those of junk bonds. I bought a couple of them in late March—Starwood Property Trust (symbol STWD) and Apollo Commercial Real Estate Finance (ARI)—because I think REITs belong in every diversified portfolio. REITs provide stock market–like returns, but they usually don’t move in sync with the market. Thus, holding REITs can add stability to your portfolio without reducing returns. Better yet, REITs are a good hedge against inflation because rents and real estate values tend to climb with rising prices.

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Kathy Kristof
Contributing Editor, Kiplinger's Personal Finance
Kristof, editor of SideHusl.com, is an award-winning financial journalist, who writes regularly for Kiplinger's Personal Finance and CBS MoneyWatch. She's the author of Investing 101, Taming the Tuition Tiger and Kathy Kristof's Complete Book of Dollars and Sense. But perhaps her biggest claim to fame is that she was once a Jeopardy question: Kathy Kristof replaced what famous personal finance columnist, who died in 1991? Answer: Sylvia Porter.