By Brian Stoffel | September 7, 2012
Our goal here at the Motley Fool is: To help the world invest. Better.
In that spirit, we've devoted a large portion of our time this September to letting the world know what it means to invest. Financial literacy isn't one of our country's strong suits, and we'd like to do what we can to change that.
In that spirit, I'll be spending this week and next revealing three of the Motley Fool's most oft-recommended stocks among our premium services, and three stocks our analysts think you should be wary of. Today, I'm going to focus on a little-known stock that four different services have recommended buying on seven different occasions in the past year.
If you're new to investing -- or even if you aren't -- the word REIT might have no meaning. The acronym stands for real-estate investment trust. In the most basic sense, REITs run by offering shares to the public for a set price. Once the money from this sale comes into the company, it buys up property, which is then leased out to others -- like families wanting a home or a new restaurant looking for a place to set up shop.
If a company does a good job at selecting property -- that which is underpriced and should have no problem finding tenants -- then the arrangement works out well. The company consistently collects rent, and it already owns the property.
But there's a hidden bonus here, too: the REITs can remain tax-exempt by paying out at least 90% of their earnings to shareholders in the form of dividends. That means once expenses are taken out, 90% of that rent money is going right back to you.
What I've written above is a very simple view of REITs. Unfortunately, like many things in the investment world, some folks have taken this very simple concept and made it much more complicated in the effort to juice their returns.
Companies like Annaly Capital Management (NYSE - NLY) and Chimera Investment (NYSE - CIM) are REITs that offer up mouth-watering dividend yields of 12.7% and 14.2%, respectively. But they are far more complicated than the basic REIT structure described above. Instead, they rely on the spread between short-term borrowing rates and long-term interest rates to turn a profit. Only one Fool premium service currently owns Annaly, and none have touched Chimera.
Today's recommendation, Retail Opportunity Corp. (Nasdaq - ROIC), however, has been warmly embraced by our top analysts. The company raises money by selling shares to the public, and uses that money to buy shopping centers, improve their performance, collect rent, and then sell the land (hopefully) for significant gains.
That alone isn't enough buy in, though. So why have the Senior Analysts at Special Ops, Inside Value, Million Dollar Portfolio, and Income Investor services recommended the company? In one word: leadership.
CEO Stuart Tanz has been involved in real estate his whole life. Back in the 1990s, he guided Pan Pacific retail to an almost 8-fold increase in value before selling the business to Kimco Reality (NYSE - KIM).
Now, he's at it again. Starting in late 2010, Tanz has been buying up shopping center properties in the depressed markets of the Amercian West. Revenue has increased from just $46 thousand in 2009 to $51.7 million in 2011. Over the last four quarters alone, that number has jumped to almost $65 million.
Just as important, the company is now turning a solid profit. Over the last month, ROIC has turned a profit to the tune of $8.3 million. And remember, most of that money needs to be paid out to investors. An improving commercial real estate market would be a catalyst to boost this already-solid business.
The company currently offers investors a respectable 4.5% dividend yield. But it's worth noting that this yield is already more than twice what it was offering just back in 2010. If business continues to improve, so too should the yield.
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