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They’re a staple of most high-yield portfolios. Just about every income investor has at least a few thousand dollars invested in this group.
There are good reasons for their popularity. These businesses throw off enormous amounts of cash. By law, they have to pay at least 90% of net income as distributions. That means they are dividend powerhouses. Yields of more than 6% are commonplace… I’ve seen a few paying more than 12%. And you can find some that pay monthly.
But it’s been a long road for these income favorites.
Between May 2008 and March 2009, the S&P 500 dropped 43%. That was a relative walk in the park compared to the 63% loss in the REIT asset class.
I was keenly aware of this drop. About a year before it started, I had visited my broker.
I was just about to head out to the World Series of Poker in Las Vegas for the summer and knew I wouldn’t have time to watch over my investments. The subprime crisis had started to make the headlines, and I was a little worried about what other shoes might fall.
I wanted to buy a few certificates of deposit (CDs), which were still paying reasonable amounts back then. He suggested some funds with a slug of real estate in them.
I said, “I’m not high on real estate. I have a mortgage on my house, so effectively I’m already leveraged in real estate.”
He told me not to worry about it. If I lost money in real estate, they’d just rebalance my portfolio at the end of the year and put even more of my money in real estate for the next year.
I didn’t know whether to laugh or cry.
Needless to say, looking back I am happy with my decision not to put money into my broker’s suggestion. But here’s the good news. Many REITs have come back strong, outpacing the broader market. That was all except for office REITs, which lagged thanks to rising office vacancies amid massive layoffs.
Now I’ve uncovered a chart that says it may be an opportune time to start locking in high yields on this specific niche of the REIT market. Take a look:
The chart shows the vacancy rates of office space in the United States. That’s a metric by which office-focused REITs live and die.
The real-estate data specialist Reis Inc. was predicting the office-vacancy rate might reach 19.3%. Luckily, it never got that high. In fact, the vacancy rate plateaued at 17.6% during the second half of 2010. And now it appears to be dropping — finally.
It’s still too early to call an office real-estate rebound. But we have to be very close to the tipping point. And with that in mind, I’m starting to add select high-yield office REITs to my real money Daily Paycheck portfolio.
Action to Take –> I think now is the time to start locking in high yields and the chance for capital appreciation in a space that’s been hated for years.
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