If you've ever wondered why some real estate investment trusts (REITs) have terrific dividend yields while others don't, and whether there's any reason not to invest in high-yield REITS, read on.
If a yield looks too good to be true, it probably is. Remember that the market sets the price of the stock. 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 KramontRealty Trust, it was the highest-yielding shopping-center REIT, paying 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 inflating the yield. 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 later sported a yield of 8.7%, before being bought out by another firm.
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.
One good way to find some high-quality REITs is through our Motley Fool Income Investor newsletter, which regularly recommends income-producing investments such as REITs. Take it for a spin for free.
In the meantime, read about some REITs in these articles: