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Intelligent REIT Investing: Rock, Paper, Scissors

Stocks in this article: REG WRI ESS CPT SKT TCO KIM

So, is the demand for shelter peaking out? No. According to Chilton, "apartment REITs are trading at a discount to other REIT sectors on an NAV basis at a time of very robust funda¬mentals. We will watch closely for the point at which the fundamentals shift back in favor of the single-family housing product, but we feel confident the multifamily growth story isn't over. Accordingly, we remain overweight the sector in our REIT composite."

Several of the larger players that I like in the sector are Essex Property Trust (ESS) and Camden Property Trust (CPT). Essex has a market cap of around $5.59 billion with a current price of $153.49. The West Coast-focused REIT has paid consistent and increasing dividends for 19 years, and the current yield is 2.87%. Camden, with a market cap of $5.81 billon, has a current price of $69.45 and is paying a current dividend of 3.23%.

The Clothing REITs

Arguably, the retail recovery is well underway and U.S. consumers have found creative ways to fill up the parking lots.

One of my favorite retail REITs is Tanger Factory Outlets (SKT). The Greensboro, N.C.-based REIT has around 39 properties and a market cap of around $3.14 billion. The company has maintained and increased its dividend for 18 years, and the current dividend yield is 2.51%.

Another favorite is Taubman Centers (TCO). The Bloomfield Hills, Mich., regional mall REIT has 24 properties and boats a year-over-year total return of 48.9%. Taubman has the highest portfolio sales per square foot, at $641 per square foot, in the mall industry, and that repeatable metric is a fundamental driver for the consistency in dividends paid. (Taubman is the only mall sector REIT that did not cut its dividend during the recession.) Its market cap is around $4.97 billion and dividend yield is 2.3%.

Kimco Realty (KIM) (KIM) is the largest U.S. shopping center owner. It has owned interests in 926 shopping centers comprising 136 million square feet of leasable space across 44 states, Puerto Rico, Canada, Mexico and South America. Publicly traded on the NYSE since 1991, and included in the S&P 500 Index, Kimco has a market cap of $8.289 billion and a dividend yield of 3.73%.

So Who Wins? Food, Shelter or Clothing?

The good news is there are no winner or losers. By owning a broad portfolio of REITs -- especially necessity-focused REITs -- investors are able to reduce volatility and gain exposure to a diverse income stream of dividends.

As Ben Graham once said: "For most investors, diversification is the simplest and cheapest way to widen your margin of safety."

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

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