FOOL'S SCHOOL DAILY Q&A

REITs in Perspective

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By Selena Maranjian (TMF Selena)
May 28, 2003

Q. Why do some real estate investment trusts (REITs) have terrific dividend yields while others don't? Is there any reason not to invest in high-yield REITs?

A. If a yield looks too good to be true, it probably is. Remember that the market sets the price of the stock. And as a stock's price drops, its yield rises.

For perspective, consider that a 30-year U.S. Treasury bond is priced to yield nearly 5%, because investors are pretty sure the dividend will be paid. But Russian government bond yields have hovered around 30% or more in recent years. Since investors are not so sure they'll end up being paid, they'll demand a higher yield before taking the chance.

The same goes with REITs, which are a special kind of corporation that owns and manages real estate properties. As an example, consider Kranzco Realty Trust. Years ago, before merging with CV REIT and becoming Kramont Realty Trust (NYSE: KRT), it was the highest-yielding shopping-center REIT, with a yield of around 15%.

Because of weak earnings, it was forced to cut its dividend. This development caused many investors to sell, sending the stock price south and the yield up. Management's dividend cut may have been enough to reposition the firm on steady ground, but investors were understandably nervous about what the future held. (Kramont recently sported a yield of 8%.)

If you invest in a REIT yielding 10%, things may well turn out hunky-dory (or not). But, if you go for one kicking out 15% to 20% or more, you're buying into income streams that other folks find rather doubtful. You'll want to do enough research to be pretty sure you're right.

To learn more about REITs, drop by the National Association of REITs website and our Real Estate and REITs discussion board. Also, here's a Fool article on REITs and another one, too. 

To learn more about investing Foolishly, visit our Fool's School. Or check out some of our inexpensive and well-regarded online how-to guides (which feature money-back guarantees).

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This question and answer is adapted from The Motley Fool Money Guide: Answers to Your Questions About Saving, Spending and Investing. For answers to this and 499 other common money questions, check it out -- it's a handy resource.