Even after a strong run, yields remain higher than most of the market
While the relentless search for yield has driven REIT share prices upward in the recent low interest rate environment, REITs still provide above-average yields as noted in the chart below:
| VNQ | WY | PCL | DLR | AMT | |
|---|---|---|---|---|---|
| CAPS rating (out of 5 stars) | 3 stars | 4 stars | 3 stars | 2 stars | 4 stars |
| Share price | $68.57 | $28.10 | $46.12 | $60.00 | $72.01 |
| Market capitalization (in billions) | $17.7 | $15.4 | $7.5 | $7.7 | $28.5 |
| Dividend yield | 3.6% | 2.8% | 3.8% | 5.1% | 1.5% |
| Source: Motley Fool CAPS – July 1, 2013 | |||||
Despite the yields on REITs remaining higher than the average for the S&P 500 (currently 2.1%), shares of each of these stocks (and the Index ETF) have experienced a pullback as interest rates have started to climb. There will likely be further pressure on REITs and other higher yield investments as yield-hungry investors begin to have more options for investment at comparable yields.
Like any other stock, buy a REIT based on the strength of the business
Given the potential sensitivity of REIT prices to interest rate fluctuations, it is important to follow the same discipline in picking a REIT as would be applied to any other stock. This involves a thorough understanding of the business and development and refinement of a long-term investment thesis. If these criteria are satisfied AND the company benefits from the favorable taxation of a REIT structure, that’s even better!
With that in mind, one of the companies in the list above stands out from the competition: American Tower. The company operates over 55,000 towers, more than half of which are international. Despite this huge number, American Tower only operates in 10 countries outside of the United States. Room for international expansion combined with the explosion in demand for wireless services thanks to the smartphone revolution has management expecting approximately 2,500 new communication sites to be constructed in 2013.
With such a solid growth story still ahead, analysts expect 27% annual growth from American Tower over the next five years. This growth, combined with the recent 15% pullback thanks to the broader retreat of REITs in the face of rising interest rates, has presented an excellent opportunity to invest in this long term winner. There is little reason to doubt that American Tower will continue to build its competitive advantage thanks to scale and prudent management.
Despite this opportunity, the stock may not be done being dragged down by the broad interest rate pressure, so it is advisable to accumulate shares over time as good value points present themselves. Regardless of short-term volatility, American Tower has a tremendous business that is made even more attractive to investors because of its REIT status. To back this bullish conclusion, I will open a CAPScall that American Tower will outperform the market.
Not sure which REIT to pick? An ETF is not a bad option
I personally prefer choosing individual stocks as opposed to ETFs whenever possible. However, the Vanguard Index ETF is a solid choice for investors looking for a combination of high yield and exposure to real estate. Aside from a broad mix of over 100 REITs in various sectors that provides instant diversification, the ETF boasts a solid performance history and a minuscule 0.1% expense ratio.
Brian Shaw has no position in any stocks mentioned. The Motley Fool recommends American Tower and Equinix. The Motley Fool owns shares of American Tower .
The article REIT Investment Opportunities Continue to Become More Diverse originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
