Real-Estate Investments: These Stocks Offer Dividends and Growth

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 investments to your portfolio but don't have the time or expertise to hand-pick a few, the SPDR Dow Jones REIT ETF  (NYSEMKT: RWR  ) could save you a lot of trouble. Instead of trying to figure out which real-estate investments will perform best, you can use this ETF to invest in lots of them simultaneously.

The basics
ETFs often sport lower expense ratios than their mutual-fund cousins. This ETF, focused on real-estate investments, sports a low expense ratio -- an annual fee -- of 0.25%. It recently yielded 3.2%, too.

This ETF has performed reasonably well, outpacing the world market over the past five and 10 years. 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 investments?
Real-estate investments don't have to be limited to just land and properties. They can include stocks and ETFs, too. The benefit of many real-estate investments is that properties tend to increase in value over time. Stocks in companies that own and lease properties are often structured as real estate investment trusts, or REITs, which are required to pay out at least 90% of their income in the form of dividends.

Many real-estate investments didn't have strong performances over the past year. Digital Realty Trust (NYSE: DLR  ) shed 23%, and recently yielded 6.4%. It invests in and operates data centers and is geographically diversified, too, with properties in the U.S., Europe, and Asia. In Digital Realty Trust's 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 a "solid backlog of leases signed-but-not-yet-commenced" that "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 $6.3 billion company. Some see the stock as attractive now, but opinions are mixed, with bears worrying whether growth in supply will outpace demand growth. At the very least, it doesn't appear to be a screaming bargain right now.

HCP (NYSE: HCP  ) , a REIT focused on health care, sank 15%. It's another solid dividend payer, recently yielding 5.8%. Its third quarter featured top- and bottom-line results that beat expectations, with adjusted funds from operations, or FFO, up 14% over year-ago levels and management raising its guidance. A plus for HCP is that a significant portion of its patients paying for their own care. While some worry that it might be hurt by rising interest rates, it has positioned itself well by locking in lower interest rates through some debt refinancing. HCP sports a solid balance sheet, but it's also reliant on relatively few big tenants.

Health Care REIT (NYSE: HCN  ) lost 8%. It's focused on buying senior-living facilities, as well as hospitals and other medical properties, which it then leases back to occupants. It yields about 5.8%, though it has been paying out more than it brings in via earnings lately, which is not sustainable over the long run. Still, the company is performing well and by focusing on health care properties can enjoy greater pricing power. Health Care REIT's third quarter featured record FFO levels up 7% over the previous year, a 9.4% increase in its seniors housing operating portfolio, and $1.2 billion in investments. It has been growing aggressively via acquisitions and is poised to benefit from aging boomers.

Other real-estate investments didn't do quite as poorly over the last year. Mid-America Apartment Communities (NYSE: MAA  ) , for example, was roughly flat -- and yields roughly 4.8%. Investors have cheered some insider buying , as that's more meaningful than insider selling. Sales can simply reflect an insider needing to access some cash, while purchases are essentially votes of confidence in the company's future. In its third quarter, Mid-America Apartment Communities reported earnings per share up 41%. Core FFO, which excludes effects from Mid-America's merger with Colonial Properties Trust, was up 10%.

The big picture
If you're interested in adding some real-estate investments 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.

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Comments from our Foolish Readers

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  • Report this Comment On January 04, 2014, at 5:46 PM, MonsterFluff wrote:

    "though it has been paying out more than it brings in via earnings lately, which is not sustainable over the long run"

    You did have comments on FFO and you should use that to decide what payout ratio is sustainable or not

    They payout 95% of FFO-- $2.295/$2.40

    While a little higher than I like to see, its probably sustainable. Earnings don't figure into what a REIT can afford to pay.

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Selena Maranjian

Selena Maranjian has been writing for the Fool since 1996 and covers basic investing and personal finance topics. She also prepares the Fool's syndicated newspaper column and has written or co-written a number of Fool books. For more financial and non-financial fare (as well as silly things), follow her on Twitter...

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