Boosting Returns With High-Yield Trusts

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Plenty of companies pay healthy dividends. But if you're looking for as much income as you can get from your investments, there are certain types of stocks that offer above-average dividends -- and the potential for strong growth as well.

Successful dividend investing takes more than just picking the stock with the highest yield. You also have to be able to count on that dividend in the future. Washington Mutual (NYSE: WM), for instance, paid a 12% dividend back in December -- before it cut its payout twice, from $0.56 per share all the way down to a single penny.

Yet certain types of assets consistently have high yields that have stood the test of time. Here, we'll look at two of them: REITs and royalty trusts.

Real estate investing made easy
Real estate investment trusts -- or REITs for short -- act a lot like a mutual fund of real estate investments. Typically, REITs own commercial properties, such as shopping malls, office buildings, hotels, apartments, or even self-storage units. They collect rent from tenants and pass it on to investors in the form of dividends.

Here are just a few examples of high-yielding REITs:

REIT	Specialty	Yield	5-Year Return
Equity Residential (NYSE: EQR)	Apartments	4.7%	13.7%
U-Store-It (NYSE: YSI)	Storage	5.6%	N/A
Host Hotels & Resorts (NYSE: HST)	Hotels	5.1%	13.9%

Source: Yahoo Finance.

One reason why REITs have such high yields is that their structure requires them to maintain a high payout ratio. A REIT must pay out at least 90% of its income as dividends in order to avoid double taxation.

After an abysmal 2007, REITs have performed fairly well so far this year, at least compared with the broader market. The Dow Jones REIT Index is down 0.4% since the beginning of 2008. Thus far, it appears that problems in the housing market haven't spread much into commercial REITs, although last year's 21% drop certainly helped the sector cool off from a long run of outperformance.

Trusting in energy
One high-yield asset has been taking advantage of the boom in energy recently. Royalty trusts typically invest in oil and gas-producing fields. As these properties produce oil and gas, owners earn a royalty from the drilling company.

Here's the scoop on a few royalty trusts:

Trust	Country	Yield	5-Year Return
San Juan Basin (NYSE: SJT)	U.S.	7.5%	27.8%
BP Prudhoe Bay (NYSE: BPT)	U.S.	11.1%	56%
Precision Drilling (NYSE: PDS)	Canada	5.7%	26.1%

Source: Yahoo Finance.

In foreign countries such as Canada, royalty trusts often have ongoing business operations that seek out new properties. However, in the U.S., royalty trusts are often established with a fixed number of properties.

That means that high yields on U.S. trusts come at a cost: Eventually, the properties will run out of oil and gas, and the flow of income will stop. In addition, because the value of royalty trust shares depends on future income, shares will eventually go to zero when the resources have been depleted.

In the meantime, though, the numbers in the chart above show how higher energy costs have contributed to big growth for royalty trust investors in the past five years. Although these gains could quickly evaporate in an oil bust, each day of production at these prices locks in strong returns that show up in dividend payouts.

There's no such thing as free money on Wall Street, and REITs and royalty trusts are no exception. If you understand the risks, however, these super-dividend payers can play a useful role in your overall portfolio.

For more on dividend investing, read about:

• Five dynamic dividend-paying stocks;
• How to get income in retirement; and
• Which dividends you can count on.