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Check Into These Hotels For Best Returns

Real Estate Investment Trusts (REITs)

Despite recent mixed signals, which were probably weather related, most analysts expect the economy to gain strength as the year progresses. If that happens, the hotel business, already picking up, should do even better. This might be a good time to get in on the action.

Owners vs. Managers
When talking hotels, there are two types of stocks to consider; property owners and property managers. Hotel property owners maintain the buildings, periodically refurbishing and upgrading the facilities. The owners typically hire management firms with strong brand recognition such as Marriot or Westin to operate their hotels. The owner receives a base rent and a percentage of the receipts.

Property Owners Pay Higher Dividends
It was almost two years ago when I last wrote about hotel stocks, July 29, 2012, to be specific. In that column, I focused on hotel property owners because many of those are real estate investment trusts (REITs), which, as a group, pay higher dividends than regular stocks. I like high-dividend stocks because you get paid to own them, even if the share price goes nowhere.

REITs trade like regular stocks, but they don’t pay federal corporate taxes as long as they pay out at least 90 percent of taxable income as dividends. However, their dividends are taxed at regular rates—the 15/20 percent maximums don’t apply.

Happy Returns
The three REITs turned up by my July 2012 screen averaged a 50 percent return over the first 12-months and 81 percent from August 2, 2012 through Wednesday, April 30, 2014. Given that track record, I used the same screen to pick candidates for today’s column.

FINVIZ Screen
It uses the free stock screener (program to find stocks meeting your requirements) provided by FINVIZ.com. Here’s how you can run the screen yourself.

Start by selecting Screener on the FINVIZ homepage (finviz.com). FINVIZ calls its stock selection rules “filters.” On the Filters bar, select “All” to display all of the available filters. Then use the associated dropdown menus to setup your filter values.

In the USA
Limit your search to lodging REITs by clicking on the Industry filter (top row) and then scrolling down until you see “REIT – Hotel/Motel.” Then use the Country filter and select “USA” to rule out foreign stocks.

High Dividends
Use the Dividend Yield filter and select “Over 3%” to limit your results to REITs paying at least three percent yields. Yield is analogous to the interest that you receive on a savings account, except that your principal is not insured by the U.S. government. Dividend yield is the next 12-months dividends that you receive divided by the price you paid for the shares. So, your yield would be 10 percent if you pay $10 per share and receive $1 of dividends over the next 12-months.  

Got Growth
Although not fast growers compared to tech stocks, you’ll do best by limiting your list to relatively fast growers in terms of revenues. Use the Sales Growth (quarter over quarter) filter and specify “Over 5%.”

Smart Money In?
Big players such as mutual funds have access to information that we’ll never see. If they aren’t buying, you shouldn’t either.  Use the Institutional Ownership (percentage of shares held by institutional buyers) filter and specify “over 40%.”

Analysts Like?
FINVIZ sorts stock analyst buy/sell ratings into these categories: strong buy, buy, hold, sell, and strong sell. Reduce your risk by sticking with stocks that the analysts like. Use the Analyst Recommendation filter to specify “Buy or better.”

Stocks that have been moving up in price tend to continue their winning ways and vice versa. Require that passing stocks have recently moved up, not down. Use the Performance filter to specify “year-to-date (YTD) up.” 

The Candidates
My screen turned up four hotel REITs. Here's a link to the screen so you can see which stocks it's turning up today.

Chesapeake Lodging Trust (CHSP): A repeat from last time, Chesapeake owns 20 mostly upscale hotels. Dividend yield 4.5 percent.

Chatham Lodging Trust (CLDT): Owns interests in 77 upscale extended-stay hotels. Yield 4.8 percent.

Hersha Hospitality Trust (HT): Owns 51 upscale hotels in major cities such as New York and Washington DC. Yield 4.2 percent.

RLJ Lodging Trust (RLJ): Another repeat from last time, owns 146 mid-priced limited service hotels such as Courtyard by Marriot and Embassy Suites. Yield 3.3 percent.

As always, consider these four REITS to be research candidates, not a buy list. The more you know about your stocks, the better your results.

published 5/2/14

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