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The REIT Answer for Your Retirement

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In the so-called lost decade of the 2000s, stock investors saw their returns dwindle to nearly nothing. But if you diversified your portfolio into different areas of the market, you saw a completely different picture during the past 10 years.

While stocks languished, real estate investment trusts outperformed domestic and international stocks as well as commodities. Yet many investors still don't know much about REITs.

Getting it REIT
To get you up to speed on REITs and what they can do for your portfolio, the Fool's retirement newsletter service decided to turn its attention to finding out more about this oft-neglected asset class. In this month's brand new issue of Rule Your Retirement, which is available this afternoon at 4 p.m. ET, Foolish financial planner and retirement expert Robert Brokamp takes a closer look at REITs and how they've performed over the past several decades.

As Brokamp points out, REITs put in the best performance of the major asset classes during the 2000s. But over the longer haul, REITs haven't seen such a smooth ride. During the go-go decade of the 1990s, stocks put together an impressive run, leaving REITs and other alternatives in the dust. And even during past bear markets for stocks, as we saw during the 1970s, REITs weren't able to keep pace with the boom in commodities that took gold and silver prices to what were then record highs.

In fact, it was the stock boom of the 1990s that helped put REITs in position for their big move. With the potential to earn massive returns through dot-com speculation, the much more modest returns from real estate investments lost their appeal. But stocks hit the skids in 2000, and investors recognized that REITs were a great value in relative terms and bid up shares in the ensuing years.

A tale of two yields
In today's market, many investors are doing everything they can to find more income. With many REITs topping the dividend yield charts, investors have naturally gotten curious about the asset class. But different kinds of REITs can have widely varying yields.

In particular, many yield-hungry investors have gotten quite familiar with mortgage REITs. Companies such as Annaly Capital (NYSE: NLY  ) , Chimera Investment (NYSE: CIM  ) , and American Capital Agency (Nasdaq: AGNC  ) raise capital through equity offerings and short-term loans, taking that money and investing it in mortgage-backed securities. With interest rates as low as they've been, the resulting spread between the income mortgage REITs earn from their investments and what they pay lenders is pure profit. And since REITs have to pay out the bulk of their income in dividends, the windfall has produced the double-digit dividend yields that investors crave right now.

On the other hand, other types of REITs focus on different areas of real estate. Simon Property Group (NYSE: SPG  ) , for instance, owns a number of shopping malls and other retail property, while Boston Properties (NYSE: BXP  ) focuses on office buildings and Equity Residential (NYSE: EQR  ) holds apartment complexes and other multifamily properties. And as many areas of real estate took a big hit during the recession, the yields on these REITs are much lower, ranging from 2% to around 3.5%. Collectively, the overall yield on REITs is just 3.4% right now, well below the long-term average of 7.3%.

But REITs aren't just for income. Some REITs present great growth prospects. One such story is General Growth Properties (NYSE: GGP  ) , a rare survivor of bankruptcy that has seen shares skyrocket after legendary investors Bill Ackman, Bruce Berkowitz, and John Paulson fought over who would have the opportunity to rescue the distressed REIT. And especially coming out of the housing bust, many investors expected commercial real estate to lead another leg down, reducing interest in commercial REITs and making them better values.

Learn more
Despite their obscurity, REITs have a number of valuable traits for investors. Brokamp points out that valuations on REITs are unusually high right now, raising concerns of another drop for the asset class. But he's still holding onto his holdings and even has a recommendation of a REIT that deserves a closer look.

To learn more about REITs and how they can make you money, you'll want to check out the new issue of Rule Your Retirement. Our 30-day free trial has no obligation, and it gives you full access to the service's insight, resources, and tools.

In uncertain times, you need to have all your bases covered. REITs offer a great chance for many investors to add exposure to an asset class they've never looked at before. Let Rule Your Retirement show you how to use REITs as part of a complete retirement strategy.

Fool contributor Dan Caplinger is a very punny man. He owns shares of Chimera Investment. The Fool owns shares of Annaly Capital. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy has all the right answers.

Read/Post Comments (3) | Recommend This Article (25)

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 March 05, 2011, at 8:47 AM, socty wrote:

    My wife is fortunate to have a REIT mutual fund option in her 401k choices, and I jumped on that when she first started working at her new job a few years ago. It has done extremely well for us. The tax deferred status makes the returns even juicier! I wish more companies offered such a broad spectrum of good choices in their retirement plans.

  • Report this Comment On March 11, 2011, at 6:31 PM, mike2153 wrote:

    The Motley Fool only rarely seems to mention the one REIT I own: Resource Capital Corp (RSO). It specializes in commercial property mortgages. It pays a dividend of $1.00 per share for a current yield of 13.8%. I bought it 14 months ago at $5.33. It's now at $7.16 - a 35% increase. That and the dividend makes me pretty happy with the decision. I've read that when interest rates do go back up again they'll have a harder time maintaining that return, but I"m happy hold on and wait it out - and reinvest those dividends.

  • Report this Comment On March 13, 2011, at 7:03 AM, Mav23 wrote:

    REITs are best held in a tax-advantaged account because of the types of income included in their distributions. Holding REITs in a taxable account means having to deal with basis adjustments and passive activity tax arcana -- or go scurrying to a CPA for help.

    Mortgage REITs, which make their money borrowing short and lending long, are using the same business model that was at the root of the last financial crisis. If their loans start going bad, watch out. Those high yields carry high risk.

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