NEW YORK (TheStreet) -- It's simple. If you think the economy is going to improve in 2014, in my view you should own REITs. Now is a great time to have more tactical REIT exposure, as REIT prices are down considerably, but the economy isn't. And dividend investors should consider REITs as part of their New Year's strategy to build a solid portfolio of income stocks that will pay off over time.
Remember that it's much better to be in an environment with increasing fundamentals and rising rates, vs. decreasing fundamentals and lowering rates. Over the long term, REITs have proven to be a good hedge against inflation because of the possibility to raise rents in an inflationary environment. Real estate has low correlation with the broader market, which increases return and reduces risk, and really diversifies asset allocation.
As you consider your tactical REIT investments in 2014, I wanted to offer you a few tips.
Tip #1: Choose dividend growth over dividend yield.One of the most tempting things for new dividend investors are high-yielding stocks. Many of the highest-yielding stocks are made up of companies ready to make a dividend cut, as banks did a few years ago. Instead of focusing only on dividend yield, investors should be looking at dividend growth. A REIT that continues to increase its dividend by 10% every year with a low yield is much better than investing in an unstable company with a current 10% yield. (VTR). Over the last twelve years, the $18 billion healthcare REIT has increased its dividend an average of 9.5% per year. Also, including the latest dividend increase of 8%, Ventas has increased its dividend by 10.3% in 2013. Ventas is trading at $57.24 a share -- a sound valuation multiple of 13.8 times price to funds from operations (P/FFO) -- with an attractive dividend yield of 5.07%.
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