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Warnings on REITs

By Selena Maranjian – Updated Nov 16, 2016 at 5:00PM

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This may be a good time to buy some, but not all, REITs.

For investors who seek income from fat dividends, real estate investment trusts (REITs) have long been an attractive option, offering easy ways to buy into portfolios of office, retail, industrial, lodging, and residential properties, among other things. But it's not always a good time to buy any particular REIT, and a Merrill Lynch analyst has recently been opining that now is a good time to avoid most REITs.

Steve Sakwa recently downgraded many REITs, upgrading his rating on only two -- Manufactured Home Communities (NYSE:MHC) and CarrAmerica (NYSE:CRE) -- from neutral to buy. Why would now be a suboptimal time to invest in REITs? Well, there are several reasons. First, as interest rates rise, REITs face pressure from bonds, which become more attractive to investors as investment alternatives.

Second, there's valuation. Many REITs have seen their prices zoom up significantly in recent weeks and months. According to a CBS MarketWatch article, "... Relative to net asset value, REITs are now trading at 107% vs. the sector's long-term average of 102%."

These cautions and explanations make sense. But it's important to remember that though an industry or sector might be unattractive at some time, that doesn't mean that every single company in them is unattractive. The airline industry, for example, has long punished investors and is still chock-full of factors that make it hard for companies to turn a profit -- think price wars, fuel costs, logistical problems, empty seats, bad weather, high overhead costs, and more. But amid all that, some airlines, such as Southwest Airlines (NYSE:LUV), have done quite well, while others seem promising, such as JetBlue (NASDAQ:JBLU). (Learn more in this Rich Smith article on Southwest and this W.D. Crotty article on JetBlue.)

If you're looking for investments that kick out significant income, such as REITs, bond funds, high-dividend stocks, and more, check out our Motley Fool Income Investor newsletter -- you can try it for free.

Longtime Fool contributor Selena Maranjian does not own shares of any companies mentioned in this article.

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JetBlue Airways Corporation Stock Quote
JetBlue Airways Corporation
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LUV
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