REIT Rebound Doubles Investors' Pleasure

BOSTON (TheStreet) -- The stock-market rally that's propelled the S&P 500 Index to a 14% gain in the past three months has featured few losers. Just nine of 154 industry groups have declined. Not only have real estate investment trusts been among the best performers, but their dividends are at least twice that of the benchmark index.

Three of the 20 top-performing industry groups in the past three months are REIT-related. Industrial REITs have surged 54%, diversified REITs have jumped 46% and office REITs are up 39%.

REITs, as the trusts are known, offer a highly liquid and dividend-paying way to gain exposure to the real-estate market without the headaches of property ownership. Companies pay out 90% of their taxable income as dividends. As a result, REITs tend to spit out very high dividends. ProLogis(PLD), Plum Creek Timber(PCL) and Brookfield Properties(BPO) pay yields of more than 4.7%, compared with 2.4% for the S&P 500.

Sure, REITs were hammered hard in the economic downturn. The MSCI US REIT Index has fallen 56% over the past two years versus a 41% drop for the S&P 500. Those dark days look like they're over. New-home sales rose for the fifth straight month in August. Stronger-than-expected consumer confidence for September bodes well for spending, bolstering the economy, the real estate market included.

As the bottom fell out of the real-estate market, REIT dividends tumbled as rental income and mortgage payments became scarce and land-value write downs dotted the landscape. Investors who bought at the top, hoping for outsized current income, are now stuck with drastically reduced yields due to their elevated cost basis. Those who get in today may enjoy the opposite. Because of the rule about dividend payments, investors needn't worry about management deciding to withhold a larger portion of profits and slashing dividends.