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TheStreet Open House

5 REITs to Grow a Portfolio

Stock quotes in this article: ACC, RYN, SNH, NLY, SSS

MILLBURN, N.J. ( Stockpickr) -- With bond interest rates at all-time-low yields to maturity, concerns about a double-dip recession and the beginning of baby boomer retirements, the need to generate income from one's investment portfolio has become increasingly important and difficult to attain. I have written in the past about low volatility stocks that yield above market dividend rates. Now I want to turn to an entire asset class, Real Estate Investment Trusts.

REITs are companies that invest in real estate and receive special tax treatment. Provided that a REIT distributes 90% of its taxable income to investors, then the REIT can avoid taxes at the corporate level, hence removing the double tax quandary that many investors face.

The REIT business has grown tremendously over the last decade. According to the industry group National Association of Real Estate Investment Trusts, the market capitalization of REITs representing 153 companies at the end of 2010 was $389.3 billion. Be forewarned that REITs do carry many risks that other stocks face such as the vagaries of the economy, interest rates and financing availability. It is necessary to introduce a unique metric for REITs. This metric: Funds From Operations, measures cash generation by the REIT. FFO equals net income plus depreciation plus amortization and less gains on property sales. FFO can then be equalized on a per-share basis. In order to compare REITs, one can use the ratio of price-per-share to FFO-per-share, sort of a proxy for price-to-earnings ratio for the industry.

Related: 2 Pair Trades for Stocks Under $5

REITs can be divided into many different subsectors. It is the purpose of this article to put together a portfolio of REITs across several of those sectors.

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