REITS provide portfolio diversification

Investors who own a typical stock and bond portfolio don’t have to go too far to find a handy diversifier. Shares of real estate investment trusts are traded on the major exchanges just like any other stock. However, unlike other stocks that represent ownership of companies, REITS offer ownership in commercial real estate. They give shareholders access to a steady income stream from property rents and the potential to participate in capital gains if the real estate becomes more valuable.

Diversifying by owning both real property and businesses is an age-old concept. The two types of investments sometimes move in parallel fashion but more often than not their gains and losses are not highly correlated. This makes real estate a good diversifier for someone heavily invested in stocks of operating companies.

It was hard for the average investor to diversify into real estate until recently because of the big capital outlays and high fixed costs involved in owning and maintaining properties. The advent of REITS has changed the equation. Now, for the price of 100 shares of stock, an investor can own part of a professionally-managed real estate venture, and participate in its ups and downs without having to do any physical or managerial work.

There are hundreds of REITS traded publicly on the New York and NASDAQ exchanges. They invest in offices, shopping centers, hospitals, hotels, and industrial complexes. Unlike the stocks of industrial or service companies, REITS are required by law to distribute the majority of their operating income to investors. That means their dividends are usually a lot higher than dividends paid on other common stock. The average returns of REITS have differed from the stock market over the short-term and the long-term. For instance, the Dow Jones REIT index lost almost 14 percent per year from 2007 through 2009, compared to a loss of just 5 percent for stocks. But over the 10 years ending in 2009, REITS gained almost 11 percent per year, while stocks had a slight loss.