1 REIT Stock for the Long-Term Investor

It is easy to see why so many investors like REITs in their portfolios. The primary reason usually revolves around dividends, since REITs are required by law to pay out 90% of their income as dividends each year. With interest rates at record lows, investors often maximize the return on their investments by finding high-yielding stocks.

With that in mind, I wanted to do the same, looking for a REIT to invest in that can boost my returns with a fairly sizable dividend. Instead of simply looking for the highest yield, I decided to look for a company that could be purchased and held for a while without worrying about how shifting interest rates could affect the bottom line. I believe I found that company in Government Properties Income Trust (NYSE: GOV  ) .

What they do
Government Properties owns and leases office space to the federal government, as well as the states of California, Maryland, Massachusetts, Minnesota, and South Carolina. With properties in 29 states and the District of Columbia, the company has a broad office pool to pull from, with more than 9 million square feet of rentable office space. These leases generated more than $200 million in lease income last year, allowing the company to reward shareholders with a dividend yield of 7%.

With 55 of its 71 properties leased by the federal government, one would expect that rents will continue to be paid. Furthermore, 68% of current lease income expires in 2015 and beyond, leaving the company well-positioned to avoid potential cutbacks in government spending. The company also actively pursues new properties, acquiring 16 properties during 2011, including the acquisition of some office space for the United Nations in New York.

High yielders I'm avoiding
As mentioned above, if I were simply looking for yield, I would consider companies like Chimera Investment (NYSE: CIM  ) or Annaly Capital Management (NYSE: NLY  ) , mortgage REITs that currently yield 16% and 14%, respectively. Both companies make money based on the spread between short-term and longer-term mortgage interest rates, passing profits through to shareholders.

That said, both companies could get stung should interest rates rise, and both have already felt the pinch and recently cut dividends. Furthermore, I share the concerns of fellow Fool John Maxfield about Annaly's method of determining management bonuses, basing bonuses not on stock performance but instead focusing on the growth of total book value. With such an easy-to-control metric at the root of the bonus structure, I'm worried it could turn out that Annaly's management has been eroding shareholder value while collecting large bonuses.

Other long-term options
The other part of my search included looking for a REIT that would be a good investment over the long run, so I took a look at some other REITs that may not yield as much but have long-term growth potential. The first company was Pebblebrook Hotel Trust (NYSE: PEB  ) . The company, under the leadership of hotel industry veteran Jon Bortz, was formed to acquire upscale, urban hotels in major U.S. cities. In other words, it isn't purchasing a Motel 6 off the interstate in Nebraska. The company has room to grow its holdings, and as it does, its currently low 2.2% yield will grow right along with the company. Combine that with its low debt-to-equity ratio relative to its peers, and it could truly be a dominant REIT in 2012.

Finally, I took a deeper look at Retail Opportunity Investments Corp. (Nasdaq: ROIC  ) . Similar to Pebblebrook, ROIC is led by an industry veteran with a track record of success. Stuart Tanz grew fledgling Pan Pacific Retail Properties from a $447 million company to a $4.1 billion Kimco Realty acquisition. ROIC purchases properties in more affluent areas with a high-traffic tenant as an anchor, such as a grocery store or drugstore. Investors have been rewarded well, with great performance last year, a current yield over 4%, and plenty of room to grow.

What it all means
Ultimately, I don't think any of the REITs mentioned here are terrible options for a portfolio; they all have their merits. The mortgage REITs boast market-leading yields right now, and Pebblebrook and ROIC are led by people who know their respective industries well. But Government Properties is my choice because of its sustainable dividend for the next five years and its reasonable growth prospects.

While it does not yield double digits like Chimera or Annaly, its performance is not as dependent on interest rates remaining at record lows. And Pebblebrook and ROIC can only go as far as their CEOs can take them, and who knows how long they will be at the helm. I am adding Government Properties to My Watchlist, and I urge you to do the same.

There are lots of great dividend stocks beyond the REIT sector, and our analysts have identified how to "Secure Your Future With 9 Rock-Solid Dividend Stocks." It's one of our most popular free reports, so click here to get your copy while it's still available.

Fool contributor Robert Eberhard is considering opening a position in Government Properties, but currently holds no position in any company mentioned. Follow him on Twitter, or click here to see his holdings and a short bio. The Motley Fool owns shares of Annaly Capital Management, Retail Opportunity Investments, and Pebblebrook Hotel. Motley Fool newsletter services have recommended buying shares of Annaly Capital Management, Retail Opportunity Investments, and Pebblebrook Hotel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 16, 2012, at 6:01 PM, neamakri wrote:

    You should be concerned that (GOV) their dividend amounts to 157% payout. To me this means they must cut dividends back,

    Personally I own shares of (PNNT) Pennantpark and (TWO) Two Harbors. PNNT is a little safer while TWO pays more. You Fools are responsible for due diligence.

  • Report this Comment On April 16, 2012, at 7:36 PM, shervic wrote:

    I agree with Robert on the future of GOV.

    Rather than net income I think it is more important to concentrate on FFO which I believe correlates to free cash flow because it is the combination of net income plus dep./amort. minus special one time transactions. For GOV in the 4th qtr. of 2011 it had 13,248 net income, 12,227 of dep., and 26,133 of FFO. From FFO it paid 16,606 in 4th qtr dividends. That seems pretty healthy to me and I like their stable tenant base going into the future. It may not be a home run but I believe the dividend will be very reliable. Thanks for the article.

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