High yielding REITs

High yielding REITs


High yielding Investment Trusts (REITs)

Real Estate Investment Trusts, commonly known as REITs, are special types of corporations that are federally obligated to get only in real estate. As long as REITs pay out at least 90% of their earnings as dividends, the companies are not required to pay income taxation’s. Generally, REITs can be divided into two categories: equity (which own physical properties) and mortgage (which purchase mortgages).

If you’re looking to invest in REITs, another good way is through REIT exchange-traded funds (ETFs). REIT ETFs provide a diversified basket of REIT holdings. They trade on stock exchanges much like equities.

3 Reasons to Invest in REIT ETFs:

  • Gaining contact with many REITs is really easy with just one vehicle (ETF), which saves investors time and commissions when compared with investing in each REIT separately.
  • ETFs are efficient and offer lower fees in comparison with other investment vehicles, such as mutual funds.
  • These funds rebalance regularly for their appropriate asset allocation.
High Yield Dividend Stocks – Definitions, Pros-Cons as well as Outlook

For the purpose of this article I am determining high yield stocks as equities yielding 6% and above. This is an often shunned group by many advisors in line with the concern that any equity paying a dividend or distribution with this range must be extremely risky. This is true in numerous cases, but often it is not true as certain equities generate this kind of yield for a variety of reasons other than simply danger. Specifically, there are three types of high yield equities which are generally misunderstood, but if one chooses carefully from the universe of those equities it is quite possible to generate higher yields for a long time. These equities are: Real Estate Investment Trusts (Including Mortgage Investment Trusts), Master Limited Partnerships, and Business Development Companies; REITs, MREITs, MLPs, as well as BDCs respectively.

REITs

REITs & MREITs

REITs are companies that consolidate the administrative centre of their investors to buy and manage income property. They often times leverage the purchased property to borrow additional funds to buy more property. MREITs do not buy physical property, rather they use investor funds to purchase mortgages and often use the equity in those mortgages to borrow additional funds to buy more mortgages. Leverage in both cases makes them subject towards the vagaries of interest rates. In some cases they hedge against unfavorable movements within the interest rates to protect their positions. There are several advantages to REITS and MREITs over taking possession of property. As long as they pass 90% of their income along to shareholders they don’t pay any corporate income tax.

The downside of this is how the stockholder is taxed on dividends at their regular tax rate and never at favorable standard dividend tax rates. This makes REITs and MREITs well suited for non-taxable accounts such as IRAs. Unlike traditional real estate opportunities, REITs and MREITs are very liquid and can be traded in a moment’s notice like any other stock. Additionally there is a multitude of REITs and MREITs available in industrial, commercial, and residential groups including, but not limited to: apartments, single family homes, nursing facilities, malls, hotels, prisons, and other types of properties. Unlike traditional real estate there isn’t any minimum (other than an individual share price) and virtually anyone can purchase them.

With the collapse of the Mortgage Market and subsequent rapid decline in the residential housing market, followed by the drop in the commercial real estate that people saw during 2008 and the early part of 2009, REITs and MREITs of each and every kind were crushed. During the latter portion of 2009, since it appeared that the FED’s extraordinary action with TARP spending might rejuvenate the economy, both REITs and MREITs in general made a substantial come back. Looking forward, as long as the FED extends the historic low interest, quality REITs and MREITs should enjoy an excellent environment for his or her business. However, when the FED indicates that it might start raising interest rates the favorable tide that’s been coming in may change. Those who prepared for the FED changing its position is going to be best prepared to face the new interest rate environment.

MLPs

Grasp Limited Partnerships, generally referred to as MLPs, are partnerships open to the public where anyone can buy units through their broker a similar way that one buys stock. The best known MLPs take part in natural gas pipelines, but there are a variety of MLPs in the areas including oil, gas, other basic materials and real estate. Such as REITs, as long as they pass along most of their income (90% or even more) to the unit holders, there is no corporate taxes. MLPs make quarterly distributions which generally consist of two components, a share of the income which is taxed at the system holder’s regular tax bracket, and a return of investment that is not taxed until you sell the units. When you market, your unit cost is reduced by the amount of principal you have received thereby yielding a higher capital gain during the time of the sale.

Often advisors say that MLPs aren’t appropriate for IRAs as a result of funky tax rule that treats the portion of the distribution that’s considered Unrelated Business Tax Income, or UBTI (if this exceeds $1000), as subject to tax even in a good IRA. In most individual accounts UBTI is a relatively small part of the distribution, but if you have significant funds in a good MLP, be sure to discuss the ramifications with your taxes accountant. For the vast majority it is a moot point because the $1000 bar isn’t surpassed.

Like REITs, MLPs are very liquid and therefore are traded through any broker just like stocks. This enables an individual investor to have ownership and appreciate distributions from huge operations that otherwise would be out of reach to an average joe. Further, as discussed above, they offer significant tax advantages, and because of the tax free corporate status generally offer higher average yields. The disadvantages would be the tax complications mentioned above.

This past year has shown substantial increases in share price for a lot of MLPs. Looking forward, barring any unforeseen events, there is no reason to think that the advantages that MLPs have shown in past won’t continue to the future. Like with REITs, there are all kinds of MLPs ranging in dimensions, quality and value, and it is important to be sure that you find the correct one that meets your investment criteria.

BDCs

Business Development Corporations were created as a vehicle for the average investor to purchase start-up and smaller companies similar to the way that partners in Investment capital Firms invest in start-ups. Funded with investor money, BDCs invest in an array of companies making a “portfolio” of firms that are funded in a number of ways including loans and purchase of equity. BDCs like REITs and MLPs are not taxed at the corporate level so long as they pass along 90% or more of their profits for their stock holders who then pay at their normal tax group.

The advantages that BDCs offer to the investor are that they provide a chance to invest in start-up and smaller operations that previously were only open to venture capitalists and private venture capital firms. The disadvantage is that their operations may not be as transparent since the investor would like and it is often difficult to tell exactly what’s going on. BDCs generally pay higher dividends due to their tax advantaged status and because of this can be an excellent position in an IRA.

As the economy improves and we move further from the recession, it would appear that the environment should be great for business development. The markets seem to have anticipated this since spring and generally BDCs did well. Barring a double dip recession or other unforeseen financial strife, the quality BDCs should continue to do well once we enter 2010.

In summary, the tax advantaged status of REITs, MREITs, MLPs and BDCs provides an opportunity to allow them to generate a greater than average yield. The improving economic conditions in america, barring any unforeseen reversal, should be a good environment with regard to these high yield, but often misunderstood entities, as we key in 2010. In each of these categories there is a selection of investments from very little risk to very high risk, generally with yields appropriate to the amount of risk. Be sure that you do your due diligence, and choose equities that meet your own criteria and fit within your own tolerance for risk.

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