Nearly one year ago, I told Income & Prosperity readers that REITs (Real Estate Investment Trusts) were one of the best places to invest in 2014.
At the time, REITs were extremely out of favor. In 2013, they moved sideways while the S&P 500 soared 32%.
In January, I wrote The Biggest Lie About REITs. In that article, I explained why most investors misunderstood how REITs actually perform during a period of rising interest rates.
Even more importantly, I predicted that REITs would rebound in 2014. Here is what I wrote:
“After a poor showing last year, REITs may be poised for a rebound in 2014. Income investors who jump on this opportunity may be able to generate a healthy income stream with the upside of capital appreciation.”
That prediction has come true in a very big way.
The Best REIT Stocks of 2014
REITs have been the single top-performing sector of the U.S. stock market this year. The Vanguard REIT ETF (NYSE: VNQ) is up 24%, compared with a 12% gain for the S&P 500 year-to-date. That means that REITs are outperforming stocks by a factor of 2-to-1. And that’s before considering the dividends!
Income investors have been attracted to REITs primarily because of their juicy yields. With low interest rates, investors continue to seek attractive income opportunities. That’s resulted in a flood of cash into REITs in 2014.
With REIT share prices rising sharply, yields have fallen. Yet those yields are still superior to blue-chip stocks. The Vanguard REIT ETF yields 3.1%, well above the average 1.9% yield in the S&P 500.
Despite their higher yield and strong performance, many investors remain skeptical about REITs. The primary concern is that REITs will underperform when interest rates rise.
Earlier this year, I explained that history tells us otherwise. Again – this is what I wrote back in January:
“Since 1979, there have been six periods of monetary tightening and rising U.S. Treasury yields. When U.S. Treasury yields are rising (as is happening now), REITs delivered average annual returns of 10.8%. And in periods when the Fed was actually increasing interest rates, they performed even better with a 12.6% average annual gain. Those returns were far superior to stocks or bonds over the same period of time.”
How is that possible? The reason is simple.
When the Fed is raising interest rates, the U.S. economy is improving. A healthy economy means high occupancy rates. Those high occupancy rates mean there is strong demand for real estate. And that allows REITs to raise their rates when they’re renewing leases or renting new space.
Of course, REITs are a capital-intensive business. Rising interest rates result in higher costs of capital for buying new buildings. But well-run REITs manage their business and expenses, and pass on that increased capital expense to their tenants.
Most investors don’t understand what’s ahead for REITs in 2015. That creates a great opportunity for astute investors.
REITs are a great long-term income investment, and one that’s overlooked and underweighted by most investors. After this year’s impressive gain, I’m less bullish on the sector for 2015.
But there are a few REITs that I strongly recommend buying today. Simply investing in a REIT ETF isn’t the best idea. Instead of just buying an ETF, you can learn all about my favorite REITs in a recently updated special. Just click here now to get the details on this timely and profitable report.
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