Reap Dividends and Profits in Real Estate, the Easy Way

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 handpick a few, the Vanguard REIT Index ETF (NYSEMKT: VNQ  ) could save you a lot of trouble. Instead of trying to figure out which companies 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. The Vanguard ETF's expense ratio -- its annual fee -- is a very low 0.10%. It also offers a significant dividend yield, recently near 3.6%.

This ETF has performed well, outstripping the world market over the past three, and five, 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?
Perhaps because there's a finite amount of it, real estate tends to increase in value over time, though not always in a straight line. Real estate investment trusts (REITs), meanwhile, offer an extra benefit, via their requirement to pay out at least 90% of their income in the form of dividends.

More than a handful of real-estate companies had solid performances over the past year. Duke Realty (NYSE: DRE  ) surged 27%, for example, and yields 3.9%. The company specializes in industrial, health-care, and office properties. Its revenue hasn't been growing much in recent years, though, and its bottom line has been in the red (with a gain in the last quarter). The company's latest earnings report will be out next week, and its last one revealed rising occupancy levels and core funds from operations (FFO), as well as the refinancing of debt. Management has explained that it's repositioning its assets, in part by selling off suburban office properties.

Health Care REIT (NYSE: HCN  ) gained 13%, and yields 4.5%. It acquired Sunrise Senior Living, boosting its elder-care facility portfolio with units that command above-average rental rates. Meanwhile, same-store margins and occupancy rates have been growing. Obamacare will boost the number of people receiving medical care, and that's likely to help REITs such as this one, which focus on health-care properties. The REIT has grown aggressively via acquisitions, and now sports a market cap above $17 billion. That means, though, that its growth rate is likely to slow.

Realty Income (NYSE: O  ) advanced 12%, and yields 4.7%. It's a retail REIT, and rather dependable, recently upping its payout for the 72nd time since it went public in 1994, and making more than 500 consecutive monthly payments over several decades. The company just announced record operating results in its second quarter, with revenue jumping 63%, and FFO per share gained 22%. Occupancy rates rose, too, from 97%, to 98%. Recent acquisitions include American Realty Capital Trust. Trading near its 52-week high, it's not a screaming bargain right now.

Other companies didn't do as well last year, but could see their fortunes change in the coming years. HCP (NYSE: HCP  ) , focused on health-care properties, tacked on just 2%, and yields 4.5%. Like Health Care REIT, it has grown rather large (with a market capitalization topping $20 billion), and that can slow its growth rate. Some worry about health-care reforms possibly reducing profits from senior-serving properties, but HCP is relatively well positioned, with a significant portion of its patients paying for their own care. Another of its advantages is its focus on triple-net leases, where tenants pay for operating expenses.

The big picture
Demand for real estate isn't going away anytime soon. 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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