Step Up Your Portfolio with Secure REITs

Physician's Money Digest, June15 2004, Volume 11, Issue 11

Diversification is important for any successfulportfolio. Real estate investment trusts(REITs) provide an attractive diversifyingtool, espcially for older and affluent physician-investors seeking income-oriented investments thatare not adversely affected by rising interest rates. A REITis a corporation or trust that owns, manages, acquires,develops, and finances real estate. As a publicly tradedcompany, a REIT allows small investors to invest in commercialreal estate by purchasing shares of the REIT. Thecompany managers use dollars pooled from investors tobuy and manage an array of properties. The REIT industrytoday consists of approximately 180 companies,which own over $310 billion of commercial real estate.

Unique Trust Benefits

There are several unique attributes that REITs afford,including the following:

  • Reliable monthly income—As investments, REITsare required to pay out 90% of their taxable income asdividends. Generally, this makes REIT dividend amounts,payouts, and yields higher than those of other equities inpublicly held companies.
  • Noncorrelation to stock market volatility—A 2002study by Ibbotson Associates, a leading authority on assetallocation, revealed that because REITs have a low correlationto the stock market, they can lower a portfolio'soverall risk and increase return.
  • Capital preservation and appreciation—REITs areconsidered less risky than most equity investmentsbecause of their high dividend yields. Almost two thirdsof a REIT's total return comes from cash dividends.
  • No double taxation to shareholders—There's onething that no investor wants to do—pay taxes. Hightaxes eat away at total returns. REITs offer an attractivetax-related benefit to help physician-investors keep moreof what they rightfully earn. REITs have no corporate taxliability, giving them the ability to pay out more real earningsto investors in the form of dividends.

Healthy Asset Variety

REITs may invest in a variety of property types: shoppingcenters, apartments, warehouses, office buildings,and hotels. Most REITs specialize in one property type,such as hotels. Some may focus in one region, while othersfocus on a national presence. Some REITs will alsoacquire properties outside the United States.

REITs seek to generate income from the rent paid bytenants in the building or leases that a REIT companyowns. They may also generate gains when a property issold at a profit. When developing a diversified portfolio,affluent investors should consider REITs in light of theirlong-term financial goals. Ibbotson Associates' studyfound that a 10% to 20% allocation in REITs couldlower overall portfolio risk and increase returns.

The study, which analyzed data from 1972 to 2002,was based on a 20% investment in REITs within a diversifiedportfolio, compared to a portfolio consisting ofstocks, bonds, and cash only. It revealed that portfoliosconsisting of REITs offer comparable long-term performanceto that of portfolios consisting of domestic stocksand bonds, while providing less risk to the overall portfoliothan the stock and bond mix.

Alternative to Dividends

REITs offer a welcome alternative to dividends.Today, less than 30% of corporate earnings are paid outto investors. With interest rates at their lowest level in 40years, the interest payments to fixed-income investors arealso low. These investors have watched their monthlyincome slashed as the Federal Reserve cuts interest rates.

REITs are ideal for doctors seeking investments thatprovide a reliable monthly income. Even in a low-interestrate environment, REITs can pay income because theearnings from properties based on long-term leases, notcurrent interest rates, determine the dividends. They'realso a solid investment for affluent investors not lookingfor monthly income; dividends can help cushion theirportfolios in declining markets.

William J. Connington III is a wealth advisor andowner of Connington Wealth ManagementGroup in Pine Brook, NJ. He specializes in workingwith physicians and health care professionalswho are committed to developing a comprehensivelong-term approach to improving their qualityof life while working toward a more securefuture. For your free report, "Alternative Investments for MedicalProfessionals," call 973-808-8181 or visit www.conningtonwealth.com.Securities offered through Linsco/Private Ledger, member NASD/SIPC.