It's been just over a week since the ball has dropped in Times
Square, and New Year's Eve hangovers are ancient history. So are
the performance figures for your portfolio over the previous 12
How well you did likely had a direct correlation as to whether
you were popping Dom Perignon corks on New Years, or opening cans
of Welch's Grape Juice. But now it's 2011, and it's a whole new
If you're among the group of baby-boomers hitting 65 this year,
there's an excellent chance you've already focused your investment
portfolio with a heavy bias towards one investing theme:
Of course traditional choices like bank CDs, "high yield"
savings accounts, and U.S. Treasuries aren't really choices at
Income from them won't even feed your pets, let alone pay the
rest of your bills and allow for a comfortable retirement. So what
will you do? What's the "big income idea" for 2011?
I've got one for you: Real Estate Investment Trusts, more
commonly referred to as REITs. They have some of the highest yields
on Wall Street.
Last year, REITs were one of the best performing areas in the
financial sector, and are quickly becoming the "darlings" of
investors in the know.
Most investors are drawn to REITs for their high-income
producing ability, but some REITs have the ability to generate
hefty capital appreciation as well.
Vanguard REIT ETF
) - which holds nearly 100 different REITs --closed out 2010 with a
respectable 24% gain. That's in stark contrast to the Financial
Sector for the S&P 500, which pretty much flat-lined for
For 2011, I expect REITs to perform in a similar fashion as last
year. But not all REITs are created equal, and not all will be
stellar performers in 2011. We'll get to two that will in a moment,
but first let's dig a little deeper into REITs.
What Makes REITs Such Great Investments?
Most of the success of REITs can be traced to one thing: cheap
money. You see, when interest rates are low - as they were for all
of last year - REITs can make a killing. Some are paying
shareholders over 19% interest to shareholders. No, that's
That kind of performance can continue as long as interest rates
stay low. The consensus among Wall Streeters is that they will.
Here's a few key reasons:
- Unemployment continues to hover just below 10%, and will
likely remain there for the foreseeable future.
- Inflation is nowhere to be seen.
- "Quantitative Easing 2" (QE2) is imminent, and there's
already talk of a "QE3".
So how do REITs offer the kind of killer returns we're talking
Their business model is quite simple: they borrow money using
low-interest, short-term vehicles. Then they use those funds to
purchase high-interest, long-term securities. Investors pocket the
difference, known as the "spread", which can be substantial.
As long as interest rates remain low, they can continually
refinance their short-term borrowings. This leads to solid profits,
and that translates into big dividends for stockholders.
REITs are required by law to distribute 90% of its taxable
income to its shareholders. This keeps dividend payments stable,
further increasing their attractiveness to income-oriented
Two REITs I Like for 2011
The first is
Annaly Capital Mangement, Inc.
). Annaly owns, manages, and finances real estate investments.
Its portfolio includes mortgage pass-through certificates,
collateralized mortgage obligations (CMOs), agency callable
debentures, and various other securities. Most of these are
purchased from Fed-backed
With a market cap of just over $11 billion, Annaly currently
sports a 14.46% yield. Institutions own about 55% of the company's
stock, and it trades at a very reasonable P/E of 13.1
It's hard for investors not to be giddy over the combination of
high yield combined with the potential of capital appreciation, and
virtually no default risk.
In stark contrast to commercial real estate lender
) - which continues to struggle -- Annaly is doing extremely well,
and has strung together several quarters of strong results. This
should keep those high dividends flowing to shareholders throughout
The second REIT I like is
American Capital Agency Corporation
(Nasdaq:AGNC). Similar in structure to Annaly, American Capital's
earnings come from investing in residential pass-through securities
Also similar to Annaly, these securities are also guaranteed by
Fanny and Freddie. Some are also guaranteed by the Government
National Mortgage Association (Ginnie Mae).
American Capital sports a whopping 19.21% yield. This is
compelling value for income-oriented investors, to say the
In summary, it's the "implied yield" for the property assets
underlying REITs that's the real secret to a REITs success. You
see, in the form of REIT shares, that property effectively trades
for significantly below the replacement cost.
You should steer clear of REITs that don't invest in government
backed securities. They carry significantly higher implied risk,
with little difference, if any, in yield.
As long as interest rates and inflation remain close to zero,
REITs will continue to generate significant earnings… and monster
dividends for shareholders who decide to invest in them.
Annaly Capital Management and American Capital are two great
examples of REITs who will have you popping champagne corks a year
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours.
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