Last year was a good one for investors holding real estate
investment trusts, better known as REITs. The nine picks followed on
my Dividend Detective site (www.dividenddetective.com)
averaged a 25% return (dividends plus price appreciation) for the
year. Despite recent bumps, most analysts expect
continued economic growth this year, which should translate to
another good year for REITs. Here’s what you need to know.
Most REITs own commercial real estate properties such as shopping
centers, apartment complexes, industrial parks, etc. Although they
trade like regular stocks, REITs are a special type of corporation.
They don’t have to pay federal income taxes if they distribute at
least 90% of their taxable income to shareholders.
That’s why many REITs pay high dividends, often equating to 4% to 6%
annual yields. As you probably know, dividend yields are analogous
to the interest rate on a savings account. However, unlike savings
accounts, your principal is not insured and you could lose money if
the market drops.
REIT dividends are mostly taxed as regular income instead of the
lower 15% or 20% capital gains rate. So it’s best to keep REITs in
Besides for the REITs that own properties, another type, mortgage
REITs, invest in loans secured by real estate. However, we’ll focus
on property REITs in this article.
Property REITs provide the customary management services associated
with leasing properties such as apartment buildings, shopping
centers and office buildings. But they can’t operate properties
requiring a high degree of personal service such as hotels and
healthcare facilities. Instead, they must lease those properties to
FINVIZ Stock Screener
I used the free stock screener available on FINVIZ.com to find
worthwhile REIT investment candidates to highlight in today’s
article. Here’s what you need to know to do it yourself.
Start by selecting “Screener” on the FINVIZ homepage (finviz.com).
FINVIZ uses “filters” to define selection criteria. You can see the
available filters by clicking on “All” on the Filters bar. Then, use
the dropdown menu associated with each filter that you want to use
to specify selection values.
Most property REITs specialize in one of these property categories:
retail, healthcare, lodging (hotels, motels, etc.), industrial,
office, or mixed industrial/office. Diversified REITs own properties
in multiple categories. FINVIZ allows you to search for REITs by
those categories. Use the screener’s Industry menu to select a
category such as “REIT- Retail.”
Then use the Dividend Yield filter to specify “over 4%” to limit
your list to high-yield REITs, and the Institutional Ownership
filter to specify “over 40%” to pinpoint REITs favored by mutual
funds and other big players.
Next, open the Analyst Recommendation menu and require “buy or
better” to insure that your REITs pass muster with stock analysts.
Because property owners must deduct non-cash depreciation expenses
when calculating earnings, even if the property is, in fact,
appreciating in value, reported income is unrealistically reduced by
those charges and doesn’t measure the actual cash flow generated by
the properties. For that reason, the REIT trade association created
a measure called “funds from operations” (FFO), which reflects the
actual cash profits generated by a REIT's operations. Although
property REITs typically report both net income and FFO, the
analyst’ earnings estimates that you see on financial sites for
REITs are typically FFO per share estimates rather than earnings per
share. Use the “EPS Growth Next Five Years” menu to select “over
Repeat the process for each category of interest. Sometimes FINVIZ
places REITs in wrong categories, so, verify each REIT’s business by
checking its profile on Yahoo! (finance.yahoo.com).
Here are seven of the REITs turned up when I ran the screen.
• Diversified: One Liberty Properties (OLP), 6.1%
• Healthcare: Omega Healthcare Investors (OHI), 5.3% yield.
• Hotel/Motel: Ashford Hospitality Trust (AHT)
• Hotel/Motel: Hersha Hospitality Trust (HT) 4.6% yield
• Industrial: Monmouth Real Estate (MNR) 5.4% yield.
• Office: Columbia Property Trust (CXP) 4.5% yield.
• Residential: Mid-America Apartment Communities:
(MAA) 4.0% yield.
As with any screen, consider the REITs listed to be research
candidates, not a buy list. The more you know about your stocks, the
better your results.