Anchor Your Portfolio With REITS
Ben Graham missed something huge when he wrote The Intelligent Investor in 1949. If you haven't heard of his book, I highly suggest you check it out here. Warren Buffett called it “the most important book on investing ever written,” and it is an integral part of any investor's resources.
It certainly isn't Graham's fault though. Modern Real Estate Investment Trusts (REITs) weren't created until President Eisenhower set up a special tax designation for them in 1960. When Graham wrote the following lines, he didn't have access to the largest dividend payouts in today's market:
“Paying out a dividend does not guarantee great results, but it does improve the return of the typical stock by yanking at least some cash out of the manager’s hands before they can squander it or squirrel it away.”
If Graham liked the idea of yanking some cash out of the manager's hands before it was spent or tossed in the bank, he'd love REITs.
REITs create massive value for their investors by returning over 90% of their taxable income to shareholders annually in the form of dividends.
Unfortunately, many investors look right past them. The unique structure used to avoid normal corporate taxation in the USA leads to some misleading metrics. Earnings-per-share, price-to-earnings and growth rates are going to look bad compared to traditional dividend and growth stocks. If you don't look beyond standard stock metrics, you will miss the total returns REITs provide.
REITs invert the common return system for investors. Instead of getting the majority of gains from rising share values and a small bonus through dividends, almost all of the returns come from the required dividends and capital appreciation creates the small bonus.
Virtually all of their profits are going to investors that own shares. Ultimately, REIT dividends paid are more than 50% of their total return composition.
REIT dividend yields have historically been a good deal higher than the average yield of the S&P 500 Index. According to the National Association of Real Estate Investment Trusts (NAREIT). The FTSE index of all equity REITS was up 8.28% for the year compared to a 2.11% gain for the S&P 500 in 2011. Equity REITS also outperformed the S$P 500 over, 1, 3, 10, 15, 20, 25, 30 and 35 year periods.
The total index averages mask targeted REIT gains as well. The Self-Storage sector led the overall REIT industry with a total return of 35.22% in 2011.
REITs function well in any portfolio as a low maintenance investment. As a long-term position, reinvesting through dividend payments is perfect for portfolio growth. The payments can then be cashed out later in life for income during retirement.
In theory, if you like a REIT, you can use it anchor your portfolio across an entire lifetime with low volatility, market-beating returns, and no fees from trading in and out of various positions.
If you've missed REITs before, now you know. For your own sake, don't skip over them now.
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