The backdrop of an improving commercial real-estate market has Fidelity liking the outlook for real-estate investment trusts.
“The group’s historical high dividend yield may appeal to investors who want the potential for steady income to help cushion their portfolio from both stock market volatility and inflation,” Fidelity says, noting the relatively low historical correlation between REIT shares and both the broad stock and bond markets. “[O]ver the long term, REITs have generally displayed characteristics that could help buffer results at times when fixed income and equities may be volatile.”
REITs are required to distribute 90% or more of their profits to shareholders in the form of dividends. Historically, REITs’ yields have surpassed S&P 500 corporate dividends, and and have often matched or exceeded Treasury and other bond yields. REIT shares reported an average total return of 8.3% in 2011 after logging gains of 28% in both 2009 and 2010, Fidelity says, while REIT yields are averaging about 4.3%.
Fidelity points out that dividends paid by REITs are typically taxed as ordinary income, a higher rate than a qualified stock dividends. Still, it says, today’s low interest rates and stingy fixed income yields have made REITs an attractive option for investors looking to increase the potential income generated by their portfolios.
Fidelity says the 2012 real estate investment outlook shows housing has struggled for several years and could continue to do so, while commercial properties are actually trending upward, aided by increasing demand against a backdrop of limited supply. In particular, Fidelity says self-storage REITs have fared well and they have much higher growth potential than some other parts of the market, although they have already seen some significant gains. Fidelity also likes distribution facilities and class-B mall operators. (credit m, anerio)