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Finding High Dividend Property REITs

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.

About REITs
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 tax-sheltered accounts.

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 third-party operators.

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 5%.”

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).

Results
Here are seven of the REITs turned up when I ran the screen.

• Diversified: One Liberty Properties (OLP), 6.1% dividend yield.

Healthcare: Omega Healthcare Investors (OHI), 5.3% yield.

• Hotel/Motel: Ashford Hospitality Trust (AHT) 5.0% yield.

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.

published 3/25/15

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