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Focus on REIT Fundamentals

Stocks in this article: OWPCVTRHTADLR

By owning a diversified portfolio that includes REITs, investors benefit from the REIT yield premium that provides a potentially attractive alternative for income-seeking investors. Intelligent REIT investors should pay attention to operating fundamentals and examine which REITs will continue to prosper even if (or when) interest rates rise.

In my sleep-well-at-night (or SWAN) portfolio, I examine the fundamentals of the high-quality REITs in an effort to make sure they can withstand the added stress of rising interest rates.

Some of the REITs in my SWAN portfolio are Realty Income (O), WP Carey (WPC), Ventas (VTR), Healthcare Trust of America (HTA) and Digital Realty (DLR).

As legendary author and investor Ben Graham taught, it's impossible to eliminate all investment risk. But by using certain valuation methods, investors can greatly minimize risk in REITs by filtering out risky REITs with poor fundamentals from the outset.

An asset-allocation strategy with REITs can enhance total return, while not adding meaningfully to risk. Even over the past decade -- a difficult period marked by two recessions, two asset bubbles, a financial crisis, and three periods of rising inflation, REITs have boosted the return of a stock and bond portfolio, while reducing overall risk.

Stay focused on the most important thing -- protecting your principal at all costs -- and you should be able to withstand market-driven adversity and sleep well at night.

Source: Bloomberg and Cohen & Steers

At the time of publication, the author owned shares of Realty Income.

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

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