When we highlighted US real estate investment trusts (REIT) at the end of last year, the security class was nearing the end of a pullback that had started in May—and the consensus forecast called for rising interest rates to bring more pain. (See After the Fall: Reconsidering US REITs.)
Our call to buy select US REITs hinged on market data demonstrating that the performance of these securities historically has exhibited scant correlation to movements in interest rates.
The five stocks highlighted in our article have generated an average total return of 25 percent, while Digital Realty Trust (NYSE: DLR), which we added to the Lifelong Income Portfolio a few months later, has gained 27.2 percent. (See Crunching the Numbers on Data-Center REITs.)
Although we’re pleased with how these picks have performed, current valuations appear frothy. At these levels, Digital Realty Trust and fellow Lifelong Income Portfolio holding Mid-American Apartment Communities (NYSE: MAA) trade above our buy targets. The same goes for most US REITs.
The yield on the 168-member Bloomberg North American REIT Index has compressed to 3.4 percent, while the Dow Jones US Select REIT Index offers a current return of 3.2 percent.
With a market capitalization of $5.18 billion, iShares US Real Estate (NYSE: IYR) provides many investors with one-stop exposure to the REIT space.
Although the average total return posted by the six US REITs we’ve highlighted this year is roughly in line with the gains generated by the popular exchange-traded fund (ETF), our favorites have delivered two times as much dividend growth and offer a higher yield.