Dividend-hungry investors have been pouring money into shares of real estate investment trusts (REITs) this year as an alternative to other income-producing investments. REITs, which own various types of large commercial properties, have become so popular that in September, Standard & Poor’s designated them as an individual sector no longer part of the financial sector.
However, after outperforming the S&P 500 stock index for much of the past 25 years, REITs have faltered since Labor Day, partly because investors fear that rising interest rates will hurt dividend-paying investments. But several types of REITs still are very attractive.
How REITs work: They typically generate income from tenant rents…plus capital gains when properties are sold. REITs are required by law to distribute at least 90% of their taxable income in dividends to shareholders.
Historically, REITs actually have performed well in rising interest rate environments. That’s because higher rates often mean improved growth in the economy, which translates into better occupancy rates and the ability to hike rents. But some categories of REITs are overvalued, such as hotel REITs, which are facing a glut of new construction and competition from AirBnB.
Attractive REITs now…
- Digital Realty Trust (DLR) owns 155 data centers in cities such as New York, Frankfurt and Hong Kong renting out computer servers that store vast amounts of digital data. Recent yield: 3.7%.
- Prologis (PLD) owns 3,350 e-commerce product warehouses. The boom in online sales has boosted demand for advanced logistics-and-distribution facilities. Recent yield: 3.2%.
- Simon Property Group (SPG) owns more than 200 regional malls and outlet centers focused on luxury retailers, which have not been hurt as much by online sales as lower-end retailers have. Recent yield: 3.5%.