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Investing in High Yield REIT (Real Estate Investment Trusts) for Amazing Dividends (like Annaly Capitol Management)

Updated on May 16, 2011

What is an REIT, and How Can I Profit From Their Amazing High Yield Dividends?

Investors that value a strong, consistent dividend every quarter often fall in love with Real Estate Investment Trusts, or REIT. Companies like Annaly Capitol Management, Ashford Hospitality Trust, MFA Financial, Extendicare and Chimera Investment Corporation all have strong portfolios with different types of real estate investments. Unlike a traditional stock, that chooses whether to release dividends each quarter, and sets a dividend payout through management fiat, the Real Estate Investment Trust is a legal term for an organization that is required to release 90% of quarterly earnings back to the investors. That means that companies will often have dividend yields of 5%, 10%, maybe even 15%! The Yields are so high that shrewd investors have to question how it's possible to maintain such high yields!

Naturally, REIT stocks aren't right for everyone. They should not be treated like a traditional stock, because they just don't operate like one, and their particular behavior means that they aren't right for everyone's portfolio.

What's Different about an REIT and How They Operate?

Real Estate Investment Trusts will manage properties they own, collecting rents, and paying back those profits to their investors. Different Real Estate Investment Trusts operate in different sectors of the real estate sphere, and knowing what kind of real estate a company manages is important to make sure that their business model is right for your portfolio.

If you ever wanted to invest in the many hotels and motels that manage different properties, and that collect room rental fees nightly, Ashford Hospitality Trust specializes in this sort of real estate investments. They finance and maintain a broad range of hotels across America, that each, in turn, pays money back to investors through the strong quarterly dividends. A common trait of Real Estate Investment Trusts is to purchase a set of stable, long-term properties that promise strong returns for years, like high-end hotels, and to manage that property to the benefit of the investors with strong business and strong returns. Hotels aren't the only property like that. Nursing homes and medical properties are a strong industry, Extendicare manages a chain of nursing home and medical facilities that will likely do well as the baby boomer population ages, increasing the number of potential tenants! Residential properties and apartment complexes are also common holdings of successful REITs, as well as commercial property in communities all over America. You may not have realized that you were surrounded by properties owned by REIT, but the aggressive returns to investors through dividend payouts means that many investors love to include REIT holdings into their portfolio.

Another potential method of turning a profit at an REIT looks to the interest rate spread between short-term and long-term loans. Investment advisers fell in love with Annaly Management a few years back, and many continue to hold this stock for the long term even after their core portfolio of mortgage-backed securities hit the rough patch of the great recession. Fortunately, companies like Annaly have careful tools and metrics they use to decide which mortgages to buy, and weathered the storm stronger than ever! If you're new to REITs and investing, it may be a little late to buy into Annaly, as they have matured and slowed down their growth, focusing instead on rewarding their investors with healthy dividends. But, take heart, because the same management team that put together the very successful Annaly Capital Management has also opened a second Real Estate Investment Trust, and this one has plenty of room to grow. Savvy financial writers all over the world are buzzing with the name Chimera. This much younger version of the successful business model pioneered at Annaly shows all the signs of a strong stock for years to come. In this model, profiting from the difference in interest rates, the only cloud on the horizon is potential raising of the interest rate by the Federal Reserve Bank. As long as the Federal Reserve Bank keeps the interest at or near Zero, Chimera will be able to maintain a very healthy Yield that will grow every quarter. Their most recent dividend payout in April of 2011 was .14 cents per share. With shares valued at around $3.50, you can imagine the relatively huge dividend payout for an investor with only a relatively small investment under $500. Even a small investment in Chimera can benefit from that huge dividend! Investors concerned about a shift in interest rates have reason to be cautious, However, the strong management team of savvy Annaly veterans should have no trouble maintaining a healthy dividend, even if it isn't $0.14 cents a share. Current Yields of around 5% are impressive, but even a future 2.5% yield after a rate hike would be nothing to sneeze at!

Remember, as long as the company is making a profit, they are legally required to pass along 90% of their earnings to the investors!

Those High Yields Do Come With a High Price

If you are excited about the REIT as an investment, hold on a moment. Remember how 90% of their profits must be passed on to investors? Anyone with some experience in the stock market must be immediately curious about growth. High yield stocks traditionally don't grow when those strong earnings aren't turned around to expand and improve business.

When a REIT wants to expand their business, they have to release new shares for new investors. Stocks will have wild fluctuations as they release stocks (a share price drop) then use those funds to expand, leading up to stronger and stronger dividends. The hope is that these new funds are used to purchase investments that are strong improvements to the portfolio, increasing in value. Normally when a company releases stock to raise funds, the individual shareholder owns less of the company. This is not always true in REITs that generally use investor moneys to expand their business, increasing the size of the company even as the number of investors increase.

After strong dividend payouts reflect the successful growth, the company looks to expand again, and releases stock. The cycle begins again! Investors are advised to be cautious and time their purchases carefully around this cycle of booms and busts. Still, these are investments that reward a patient player. The strong quarterly dividends will continue regardless of stock price. This is a buy-and-hold investment that will not grow explosively, but will always return income to the investor.

REITs are starting to sound difficult. The last thing any investment should be is difficult. One of the easiest and safest ways to get involved in Real Estate Investment Trusts is through mutual funds that have strong REIT holdings. The Vanguard REIT Index Fund is an excellent way to invest in a broad range of Real Estate Investment Trusts, in all the many and diverse businesses they pursue. Available as an ETF, as well as in a traditional mutual fund account, the Index Fund provides safety to the investor as the risk is spread across the industry. Individual REITs may provide a higher distribution to the investor, but nothing can match an index fund for easier and lower-risk exposure to an industry that is poised to do well over the next few years as the real estate industry recovers from the sharp decline of the Great Recession.


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    • Ruchi Urvashi profile image

      Ruchi Urvashi 6 years ago from Singapore

      Interesting and very informative hub. I invest in AGNC and NLY and they provide me good dividend income.

    • profile image

      Kommadant 6 years ago

      Another great REIT to look into would be ticker symbol O, Reality Income Corp.