There may not be a better time for investors to consider adding an REIT portfolio to their existing asset management strategy. A perfect storm is brewing, and those that get in early could be in line to capitalize on very encouraging dividend yield forecasts.
For what it’s worth, the real estate industry has done very well for itself in the current post-recession market environment. Homes have appreciated at a torrid pace and equity has returned to cities that have been void of it for far too long. What’s more, the unemployment rate has improved significantly and should buttress the entire economy. Nearly every fundamental indicator is better off today than it was just a few short years ago. Having said that, the recovery has certainly contributed to the portfolios of savvy real estate investors across the country. Those who bought at the depths of the recession are likely reaping plenty of rewards.
It’s worth noting, however, that the current recovery has done a lot more than help those who currently own property, or even a real estate portfolio for that matter. Not surprisingly, real estate investment trusts (REITs) have made headlines for the better part of 2016 for one simple reason: the housing recovery. REITs are growing in congruence with the housing sector’s improvements, and the need for an REIT portfolio has never been greater. The more ground the housing recovery gains, the more relevant REITs become to respective investors’ real estate portfolios. It’s not a coincidence that REITs have outpaced the broader market indices since the onset of the recovery.
I maintain that a properly diversified real estate portfolio must contain both near-term and far-term investment opportunities. In addition to the passive income rental properties and rehabs that have become synonymous with today’s residential redevelopers, investors must solidify long-term yields with the help of an REIT portfolio. Nothing, at least that I am aware of, carries more promise for long-term dividend yields at the moment than real estate trusts. Do yourself a favor and at least consider what the advantages of an REIT portfolio in today’s market could mean for your financial future.
In order to understand how important an REIT portfolio is to a diversified investment strategy, you must first understand what they are and how they work. As their name suggests, REITs are essentially those companies that own (and potentially operate) income producing real estate assets. Not unlike mutual funds, real estate trusts provide savvy investors with what they covet the most: regular income streams, diversification and long-term dividend yields. What’s more, thanks to the powers that be, REITs are required to pay out all of their taxable income as dividends to shareholders.
In their truest form, REITs promote the investment in large-scale property portfolios in the same way the average investor would invest in a stock option. Instead of receiving money when a stock performs well, however, REIT shareholders cash in by receiving a share of the income produced from actual real estate deals. They simply represent another branch on the investment tree that is real estate. While they may not represent physical investments in tangible assets, they are nonetheless an investment of capital into the real estate industry. REIT shareholders are no less real estate investors than those with boots on the ground remodeling homes.
That said, the performance of REITs are directly correlated to the state of the real estate industry, which is doing very well at the moment. It’s now more important than ever to diversify your real estate portfolio with REITs than ever before, especially if you want access to what many industry pundits are forecasting to be encouraging long-term dividend yields.
Let’s take a look at a few of the reasons REIT portfolios should be at the top of everyones’ wish list this fall when the set out to diversify their real estate portfolios.
First and foremost, REITs have earned the right to be among the ranks of today’s top investment opportunities. As I hinted at before, REITs have demonstrated an increased propensity towards growth since the recovery initiated some time ago. Over the first six months of the year, REITs have actually outpaced the S&P 500. Due, in large part, to healthy fundamentals and capital markets, REITs prevailed in less than certain market conditions. As a result, the “FTSE/NAREIT All REIT Index had a total return of 13.7 percent, while the S&P 500 Index gained 3.8 percent” over the first six months of 2016, according to REIT.com.
It’s safe to say that the progress made by the entire real estate sector contributed to healthy growth in the REIT sector, but global uncertainty did its part to make relatively safe real estate trusts look even better. For what it’s worth, many investors turned to REITs because the rest of the markets were, well, less than encouraging.
“REITs have done really well relative to the broader market,” said David Rodgers, senior real estate research analyst at Robert W. Baird & Co. Inc.
Rich Moore, managing director at RBC Capital Markets, noted that “in general, the broad fundamentals for the real estate sector look pretty sound… We don’t see any material weaknesses developing broadly.”
If the overwhelming sentiment surrounding real estate trusts isn’t enough, the latest addition of a real estate sector to the S&P 500 should put REITs on display. No more than a week ago, a new real estate sector was added to the S&P 500 to acknowledge the prevalence of the housing market. If for nothing else, real estate has earned the right to be traded independently from the financial sector it, up until recently, resided in. According to CNBC, the “move primarily affects real estate investment trusts (REITs), moving 28 issues with nearly $600 billion in market cap out of the financial sector and into the new real estate heading.” Not surprisingly, the move will generate a lot of exposure for REITs, which are expected to receive a lot of attention from trust managers.
Investors looking to diversify their portfolios will need to account for the new sector, and are thus expected to move billions into it to simply maintain a balance. The allocation of funds should provide a significant boost to REITs for the foreseeable future and those that bought in at the right time.
An REIT portfolio, as far as I am concerned, is a necessary addition to any diversified investment strategy in today’s market. Real estate trusts have proven that they belong in today’s best portfolios, and there is no reason your investment strategy shouldn’t contain at least a few promising REITs. If you want to further your real estate investing efforts, look no further than an REIT portfolio.