Real Estate Investment Trusts (REITs) Investment U
Post on: 22 Май, 2015 No Comment
by Floyd Brown Wednesday, August 6, 2008 Market Trends
by Floyd G. Brown, Advisory Panelist, Investment U
Wednesday, August 6, 2008: Issue #833
The current bear market has pounded anything that has to do with real estate. Banks and real estate investment trusts have been hit particularly hard.
One of the main problems with banks is that we have no idea how bad the loans in their portfolios are. Banks have been downright deceitful about the number of under-performing loans they’ve hidden in their balance sheets. And the residential mortgages they hold are dropping in value as the real estate market loses value.
But unlike the banks, real estate investment trusts or REITs have been able to protect their value. and their income.
The majority of REITs own commercial properties with long-term tenants, stable values and fixed income payments. However, this hasn’t had any impact on Wall Street’s fears. They’ve dumped anything and everything with property exposure. And this irrational behavior is giving us opportunities to pick up shares of three underappreciated dividend powerhouses.
Understanding the Property REITs Hold
There is very little we can do to assess the loans given by American Express to its cardholders, or by Citibank to a real estate developer in South America, or even the derivatives contracts held by AIG with investment grade counterparties. But we are very capable of understanding the property REITs hold.
When Congress created REITs in 1960, they were attempting to let small investors benefit from a diverse portfolio of large-scale real estate investments. While protecting investors through the diversification of these portfolios, the greatest advantage of REITs is in their dividend power.
REITs Distribute 90% of Their Taxable Income
By law REITs are required to distribute 90% of their taxable income. Because these distributions are passed directly to shareholders, taxes are paid only once. It avoids the double taxation of dividends other investments are subject to. (Reducing investment expenses is one of our 4 Pillars of Investing .)
Today, many REITs are trading at multi-year lows, and would represent an attractive investment even without dividends. But it’s through the dividends, and the ability to reinvest them, that can lead to the greatest gains. By reinvesting and compounding the dividend growth, investors can see their money double in a short time. Take a look.
