Patience pays!

That was the mantra of real estate and utility investors as those sectors fell from grace. As the New Economy emerged, the oldest of the Old Economy stocks withered on the vine. Combine their out-of-favor status with the uncertainties of utility deregulation and the management missteps of a handful of real estate investment trusts and -- other than precious metals -- you get the two sectors at the bottom of the investment barrel.

While the last two years have been trying for REITs and utilities, 2000 is off to a terrific start, with the stocks behaving exactly as pundits predicted. "Get a little volatility plus a 'tech top' and investors are fleeing for security," says Ted Bridges of Omaha's

Bridges Investment Counsel

and manager of the

(BRGIX) - Get Report

Bridges Investment Fund, a growth and income mutual fund. "Dividends look very good in a volatile market. Finding a way to get part of your expected return in cash can be a very good thing."

While these once-beleaguered sectors are regaining favor with investors, some worry about the staying power of the rallies. Is there still time to join the party? It depends on your expectations.

First, a look at REITs.

Real Returns With Real Assets

After two years of double-digit declines, REITs are providing shelter from a stormy market. Since January, REIT stocks have gained nearly 10%, yet the average REIT still pays a dividend of nearly 9%. Still, while REITs have outperformed both the

S&P 500

and the

Nasdaq Composite

since the beginning of the year, over the past 12 months REITs have just broken even, while the S&P 500 has gained about 10% and the Nasdaq more than 40%. "REITs still remain depressed," says Ritson Ferguson, president of

CRA Real Estate Securities

. "A 10% rally has not exactly put REITs back at fair value."

REITs Have Their Day in the Sun

Morgan Stanley REIT Index vs. the Averages

Yet there is reason for joy and hope in REITville. This is the longest sustained rally in real estate stocks since early 1997, and there are good reasons to think it will continue. "Investors are moving to companies with real assets and real earnings," says Bridges. "Valuations got way too cheap and capital is moving to undervalued sectors. Even with the recent move higher these stocks are still inexpensive." (There are those who have

questioned the sustainability of the rally.)

REITs are turning in solid first-quarter earnings -- about 10% growth on average -- with few unpleasant surprises. "Earnings have been better than expected," says Ferguson. "That should give this rally legs."

He cautions, however, that investors need to be realistic about future gains. "I don't think we'll gain 4%-5% a month and we could see a slowdown or even relative underperformance as other indices come back," he says. "Still, I don't see people flocking back to tech and abandoning REITs. A balanced investment perspective that favors income as part of total return seems to be back in favor."

So, what can you expect from REITs going forward? David Fick, REIT analyst at

Legg Mason

, thinks annual returns in the 12% area are realistic over the next two years, with 8.5% coming from the dividend and 3.5% from price appreciation. He suggests investors look at two groups of companies -- the blue-chip names with more conservative risk profiles and those that have solid dividend coverage with a history of dividend increases.

Among the blue-chips he likes are

AvalonBay Communities

(AVB) - Get Report


Camden Property Trust

(CPT) - Get Report


Duke-Weeks Realty Corp.

(DRE) - Get Report


Weingarten Realty Investors

(WRI) - Get Report


Simon Properties

(SPG) - Get Report

. Legg Mason rates all of those REITs as buys and has done banking for all except Weingarten. "Blue-chip REITs should be among the first to attract investors as the rotation begins. All of these have investment-grade credit ratings and most will increase dividends in the next 12 months."

Conversely, most analysts and fund managers agree that investors should shy away from the challenged few. "A few bad REITs have spoiled the industry in the past," says Jim Grissett, portfolio manager with Atlanta's

Parthenon Group

, a real estate investment manager. "Now you see solid companies beginning to move and those with issues are still dead money. Stock selection will remain important."

On balance, REITs looked poised to hold their gains and possibly move slightly higher. And, even if they do overheat a bit, the recent gains make depressed investors a little happier. "There's a lot of liquidity looking for places to hide," says Grissett. "The relatively small liquidity

of REITs may cause the REIT market to overshoot itself, but, heck, after what we've been through we deserve some of that."

In Part 2: Is the juice sustainable at utilities?

Christopher S. Edmonds is president of Resource Dynamics, a private financial consulting firm based in Atlanta. At time of publication, Edmonds had no positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While Edmonds cannot provide investment advice or recommendations, he welcomes your feedback at .