Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you'd like to add some real-estate stocks to your portfolio but don't have the time or expertise to hand-pick a few, the iShares Cohen & Steers REIT ETF (NYSEMKT: ICF ) could save you a lot of trouble. Instead of trying to figure out which real-estate stocks will perform best, you can use this ETF to invest in lots of them simultaneously.
ETFs often sport lower expense ratios than their mutual-fund cousins. This ETF, focused on real-estate stocks, sports a relatively low expense ratio -- an annual fee -- of 0.35%. It recently yielded 3.3%.
This ETF has performed reasonably, outperforming the world market over the past five and 10 years, but not the past three. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
Why real-estate stocks?
Real estate tends to increase in value over time, though not always in a straight line. Many real-estate stocks are structured as real-estate investment trusts (a.k.a. REITs), which are required to pay out at least 90% of their income in the form of dividends.
Some real-estate stocks had strong performances over the past year. But with our economy still not in high gear, many real-estate stocks did not. Fortunately, their future performance counts more than their past.
Realty Income (NYSE: O ) shed 3% and yields 5.6%. It's a retail-focused REIT, employing the profitable triple-net lease model. (It owns vineyards, too.) Realty Income is also rather dependable, recently upping its payout for the 73rd time since it went public in 1994 and making 520 consecutive monthly payments over several decades. Its third quarter featured funds from operations (FFO) per share growing by 15.4% and occupancy rates of 98.1%, and it has been growing in part via acquisitions.
Health Care REIT (NYSE: HCN ) also gave up 3%. It yields 5.3% and is focused on buying senior-living facilities, as well as hospitals and other medical properties, which it then leases back to occupants. Its third quarter featured record FFO levels up 7% over the previous year, a 9.4% increase in its senior-housing operating portfolio, and $1.2 billion in investments. It, too, has been growing aggressively via acquisitions, and is poised to benefit from aging boomers.
HCP (NYSE: HCP ) , another REIT focused on health care, slid 15%. It's another solid dividend payer, yielding 5.5%. Its third quarter featured top- and bottom-line results that beat expectations, with adjusted FFO up 14% over year-ago levels and management raising its guidance. HCP was recently praised for its energy efficiency and recycling initiatives. HCP is relatively well positioned, with a significant portion of its patients paying for their own care.
Digital Realty Trust (NYSE: DLR ) sank 27% and yields 6.6%. Digital Realty Trust invests in and operates data centers. It's geographically diversified, too, with properties in the U.S., Europe, and Asia. In its last quarterly report, earnings came in below expectations, debt rose, and management lowered its guidance, leading to a drop in the share price. Management also noted, "While lease commencements have lagged our initial expectations, the solid backlog of leases signed-but-not-yet-commenced represents contractual obligations for future rental revenue, and sets the stage for healthy growth in cash flows over the intermediate term." Meanwhile, Digital Realty Trust has some ambitious stock buyback plans under way, to the tune of about $500 million, which is significant for a $5.9 billion company. Some see the stock as attractive now, but opinions are mixed.
The big picture
If you're interested in adding some real-estate stocks to your portfolio, consider doing so via an ETF. A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
Psst -- bet you haven't heard of this company
The Motley Fool's chief investment officer has just hand-picked a potential big winner for opportunistic investors, which he details in our new report: "The Motley Fool's Top Stock for 2014." To find out which stock it is and read our in-depth report, simply click here. It's free!