BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

3 REITs To Buy That Are Yielding 10%

Following
This article is more than 8 years old.

Picking stocks is like buying cars.

You drive into the car dealership and the first thing that you see is the sticker price on the vehicle. You walk around the car lot looking in the window and then glance over the list of features. You quickly scroll down to the end of the key facts until you see the asking price for the automobile. Then you scream, “sticker shock”.

I just finished up the February edition of the Forbes Real Estate Investor. In the monthly newsletter I research around 100 U.S. Real Estate Investment Trusts (or REITs) and from that list I screen for the most durable dividend payers using a variety of research tools.

Although my goal is to assess the overall health of each REIT based on a variety of methods, my most critical element of the research process has to do with dividend safety.

Forbes Real Estate Investor
Earn safe, reliable income with the help of veteran real estate expert Brad Thomas in Forbes' newest advisory Forbes Real Estate Investor.

Using the car lot analogy, the sticker price for REITs is the company’s dividend yield. At least that’s one of the first things I look at before researching a REIT.

Of course there’s a difference. A high dividend yield indicates that a stock is cheap and a low dividend yield indicates shares are expensive. It only makes sense that Mr. Market who regularly appraises public stocks would provide a really cheap security with a higher dividend yield to entice potential buyers to purchase shares.

But what if the stock (or a car using my analogy) is a lemon. In other words, what happens if Mr. Market places a really cheap price on the stock just to lure in the greedy investor and then once the foolish buyer drives home, the wheels fall off the car?

There is a way to avoid buying a lemon though, and that’s why I regularly preach the importance of conducting due diligence. Just like buying a car, intelligent investors must always look under the hood so he or she knows his principal is safe and that he (or she) will get a fair return in his/her money.

Part of my job, as a REIT analyst, is to assist you with research in hopes of steering you away from the bad lemon experience. Just like a mechanic, my job is to break down the REIT vehicle to insure that the yield is not a “sucker yield” and that the stock selection is not an inherently vulnerable business model.

Much like buying a car, REITs must have durability attributes that means the profits must be able to take a lick’n and keep on tick’n. A REIT that cannot sustain its dividend payout is like a car that has over 200,000 miles. In order to feel safe, a REIT must be well-covered (by earnings or in REIT world we call it Funds from Operations) and the management team must be committed to maintain and increasing the dividend.

As a rule of thumb I usually recommend stalwart REITs that have a long track record of paying and increasing dividends . It’s really hard to go wrong with companies like Realty Income (O), W.P. Carey (WPC), National Retail Investors (NNN), and Omega Healthcare Investors (OHI) – all of which have demonstrated exceptional risk management practices through multiple economic cycles.

But today I’m going to tell you about a few specials that could turbo-charge your REIT portfolio.

Around a week ago a number of commercial mortgage REITs went on sale, at least that’s how Mr. Market decided to price the shares. Unlike traditional mortgage REITs, commercial mortgage REITs are exposed to commercial real estate, not residential long-duration mortgages. Essentially a commercial mortgage REIT is similar to a bank that loans money to borrowers with loans secured by commercial real estate.

As a result of the pullback in this specialty REIT sector I decided to increase my exposure, almost doubling my concentration within this non-core REIT category. I picked up shares in all three of these REITs: Blackstone Mortgage (BXMT), Starwood Property Trust (STWD), and Ladder Commercial (LADR).

It’s always nice to pick up some double-digit yields, especially when you know the market has mis-priced the shares that will ultimately lead to the possibility of enhanced share price appreciation.

Always remember, a dividend payment is the ultimate sign of corporate strength and while the yield may indicate shares are cheap, it’s critical to always kick the tires and make sure that you don’t get home and scream out, “I was the sucker”.

Brad Thomas is the Editor of The Intelligent REIT Investor and he also created the definition for “sucker yield” (as found here in Investopedia). He owns shares in O, WPC, OHI, BXMT, STWD, and LADR.

Brad Thomas is editor of Forbes Real Estate Investor and writes for Forbes.com and Seeking Alpha. He is also a frequent guest on Fox Business and he is currently writing a book, The Trump Factor, about presidential candidate Donald J. Trump.