The Right REIT Can Pay Off

One downside is that the higher prices have pushed dividend yields down, meaning investors get less income relative to the price of the stock. The average yield for REIT stocks recently slipped below 4 percent. That’s less than half of what they paid when stocks bottomed out in March 20

 The stocks have gained in part because they appeal to investors unhappy with the recent near-record-low returns for many less-risky investments. Ten-year Treasurys, for example, yield around 3 percent. That’s led many investors to search elsewhere for income, lifting demand, and prices, for REITs and other dividend-paying stocks.

That popularity means REITs have found plenty of additional investors. REITs have raised $31 billion through May, from issuing additional stock and debt. That’s on pace to beat the full-year record of $49 billion set in 2006. Four REITs have completed initial public offerings this year, a further sign of market confidence in REITs. The cash influx leaves REITs with more money to buy property.

However, the opportunity for REITs to raise money inexpensively may be short-lived. If the economic recovery picks up speed, interest rates are likely to increase, raising REITs’ borrowing costs. That would make it more expensive to acquire new properties, which could crimp REITs’ stock prices. Higher rates would also lift bond yields, making them more competitive with REIT dividends.

The threats of higher rates and inflation recently led Cohen & Steers Realty Shares to buy more shares of apartment REITs. Apartment owners are in a better position to raise rents annually in response to an improving economy than owners of office properties with multi-year leases, said Jon Cheigh, co-manager of Cohen & Steers Realty Shares, a REIT mutual fund.

He expects REIT dividend payments will rise around 10 percent a year over the next five years, which could bring yields back up. A key reason is his expectation that demand for commercial properties will exceed supply for years to come.

That could prove to be wrong if the economic recovery stalls.

“That would be bad for REITs,’’ he says. “But it would also be bad for lots of other investments, too. I don’t see a lot of risks out there that are specific only to REITs.’’ (credit, m,jewell,boston globe)

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