With treasuries at all-time lows and concerns over the stock market's recovery, savvy investors have had to look elsewhere to find solid yields. Sure -- big name players like Procter & Gamble and Verizon pay good dividends and have sustainable businesses, but after the financial panic of 2008 and the flash crash this past May, many people are just too fearful to get back in the game.

One sector that has shown resilience and the ability to dish out cash has been real estate investment trusts (REITs). The industry had two good quarters in the last of 2009 and the first of 2010, and despite a slowdown in the second quarter of this year, REITs have still managed to outperform the S&P 500. Right now they are averaging a dividend yield of about 4.1%, compared to 3% for 10-year treasuries. 

In general, low interest rates and an increase in federal housing lending has helped the sector gain momentum. Many of our 165,000-strong CAPS community feel that REITs will continue to outperform the market, so I wanted to take a look at four-star stocks that may just have what it takes to reach five-star status.



Market Capitalization (millions)

Previous Day Close

Chimera Investment (NYSE: CIM)




Health Care REIT (NYSE: HCN)

Health Care



NorthStar Realty Finance (NYSE: NRF)




Source: Motley Fool CAPS.

Drilling beneath the surface
Chimera, which is a spin-off of Annaly Capital Management (NYSE: NLY), hasn't necessarily done as well as its big brother has over the last year, but investors can't complain too much. The company saw a big bump in fourth-quarter earnings as it was able to buy some deeply discounted securities. During the first quarter, it reported earnings per share of $0.19, compared to $0.11 from the year prior. If borrowing rates continue to stay as low as they are, Chimera should be able to sustain profits as it typically earns a spread between investment yields and its borrowing costs. With an 18% yield and 95% of CAPS members expecting Chimera to outpace the market, this may be one REIT to keep your eye on.

Despite a 63% drop off in net income for the first quarter of 2010, many CAPS investors are still optimistic about Health Care REIT. The company has completed $700 million of gross investments during 2010, causing it to up its guidance for the year to a range of $700 million to $1.1 billion. As the baby boomers get closer and closer to the golden years of retirement, Health Care REIT should stand to take advantage as it continues to invest in assisted and independent living facilities.

NorthStar Realty deals primarily with commercial real-estate debt and net lease properties. While big-time office parks and industrial centers have fared pretty poorly, smaller ventures, like convenient stores and fast-food restaurants have done excellently. According to the Wall Street Journal, net-lease investments like the ones mentioned above are among the best-performing sectors of commercial real estate. However, so far NorthStar hasn't been able to capitalize -- its first-quarter earnings per share were ($0.41) in the red, way below analyst expectations. Yet with a 13.7% dividend yield and a recent $1.1 billion CDO purchase from CapitalSource (NYSE: CSE), over 94% of CAPS members expect this REIT to outperform.

The foolish bottom line
Over the last year, the Vanguard REIT ETF (NYSE: VNQ) has been able to generate a whopping 67% gain, head and shoulders above the gain of the broad market.

Do you think the four-star companies mentioned above have what it takes to continue their stellar rise, or are they doomed to failure? Let us know what you think in the comments box below!

Jordan DiPietro owns no shares mentioned above. Health Care REIT and Procter & Gamble are Motley Fool Income Investor selections. The Fool owns shares of CapitalSource and Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.