Are REITs Right for Right Now?

It seems as if I struck a nerve with Monday’s blog on REITs (Real-Estate Investment Trusts) because suddenly everyone is talking about them. Just a few minutes ago, CNBC reporter Matt Nesto did a piece on REITs saying that according to investment bank UBS, REITs deserve another look. The three reasons he gave are the following:

1. The unprecedented injection of liquidity by the Fed into the housing and mortgage markets. (The Fed just today injected $200 billion into Fannie Mae and Freddie Mac in an effort to ease the credit crunch in the housing market.)
2. In terms of pricing, there’s a difference in perception between the stock market and the private market.
3. REITs hold hard assets (buildings) so you can get a price on them.
He also gave the names of UBS’s favorite REITs: Boston Properties (BXP), Digital Realty (DLR), Essex Property Trust (ESS) (also in my covered call portfolio), Kimco (KIM), Macerich (MAC), Annaly Capital (NLY), Senior Housing Properties Trust (SNH), Simon Properties (SPG), and Taubman Centers (TCO) which is breaking out today. My two cents on the above: I’d stay away from NLY and DLR for the moment because of their recent volatility. I mean, with so many other good plays in the sector, why expose yourself to unnecessary risk?
And speaking of good plays, here’s a list of stocks that are either breaking out today or have recently broken out in order of dividend yield:

As I mentioned on Monday, REITs make a good addition to tax-sheltered accounts because of their generous dividend pay-outs and now is the time to buy them while the sector is in the beginning of its recovery stage. Of course, loading up on a bunch of REITs won’t help diversify your portfolio, but if you do select some, you can at least diversify among them. Each REIT has its own niche, spanning the sectors from healthcare, senior living, public storage, entertainment (movie theaters), shopping malls, industrial buildings, apartment rentals, student housing, and other various commercial and residential properties. Are REITs right for you? If you find they fit in with your investment philosophy, now would be the right time to add them to your portfolio.
Update on Monday’s REIT covered call portfolio:
On Monday I set up a covered call portfolio composed of six REITs that will all be paying dividends between now and April options expiration. I purchased 500 shares of each of the mentioned stocks at their closing prices and sold 5 ATM call contracts at the last bid prices. (Had I waited a day to write the calls I would have gotten much better prices.) Be that as it may, the total cost of the stocks was $174,930 and the money I received from the calls was $4,560, yielding a 2.6% return. (All prices include $9.95 commission/stock trade and $14.95/options trade.) If everything works out well at April expiration, my calculations show a total gain of about $11,900 giving me a monthly return of 6.8%–yay me! If I were to do this again I would weight the portfolio more equally in terms of dollar value instead of equal share value, FYI.

How are my picks doing? I’m so glad you asked. UDR broke out of its channel yesterday; Entertainment Properties (EPR), AvalonBay (AVB), and Essex (ESS) are breaking out today; and Mack-Cali (CLI) and Developers Realty (DDR) are nearing their breakout points. So far it looks like my covered call portfolio is going to work out quite well–yay me!

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