The Intelligent REIT Investor Guide

CHAPTER 2REITs Versus Competitive Investments

“The investor should be aware that even though safety of its principal and interest may be unquestioned, a long‐term bond could vary widely in market price in response to changes in interest rates.”

—Benjamin Graham

When deciding if REITs are appropriate investments for you personally, it's often helpful to compare them with other assets. Admittedly, this isn't always easy considering how unique they truly are. But I still see it as a worthwhile endeavor, hence the purpose of this chapter.

To start off, REITs trade as stocks because, technically speaking, they are stocks. Yet they're markedly different from companies such as General Electric, Microsoft, or Disney because of their higher dividend yields and more modest capital appreciation prospects. Therefore, while it's useful to compare them to the broad equities markets, it might be more worthwhile to put them up against bonds, convertible bonds, preferred stocks, and higher‐yielding common stocks, even master limited partnerships (MLPs).

These are the investments of choice for income seekers looking for lower volatility, zero to modest capital appreciation prospects, and reduced risk. So let's look at each of them.

Bonds

Bonds, particularly so‐called junk bonds, usually provide higher yields than the average REIT. But the investor gets only the interest coupon and no growth potential. That's because they're so safe, promising repayment of principal at maturity. In the absence ...