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New Purchase and a Bit About REITs

Today I accomplished one of my goals for the year. After quite a lot of difficulty dealing with Vanguard (more on that later), I have become a real estate investor. I don’t have the kind of capital to purchase a rental property, but that doesn’t mean I can’t have real estate investments. Thanks to real estate investment trusts (REITs), anyone can invest in real estate.

REITs are companies that own income-producing real estate such as offices, hotels, healthcare facilities, apartments, shopping centers, etc. REITs are set up differently than most companies, in that they are required to distribute at least 90% of their taxable income to shareholders, and generally pay little or no corporate income tax. However, because the money is not taxed at the corporate level, the dividends are taxed as ordinary income for the shareholders, as opposed to the 15% dividend tax you’d pay on most of your investments. 
Because REIT dividends are taxed higher than other dividends, a good strategy is to keep your REIT investments in a tax-advantaged account, where the dividends can grow tax-free. Following this strategy, I purchased two REITs today in my Roth IRA. 
My first purchase was Digital Realty Trust (DLR), a company that owns 108 data centers in Europe, North America, Asia, and Australia. I was drawn to this company immediately because I like the idea of investing in data centers. With the recent rush toward the cloud, many companies are abandoning costly in-house data centers and storing their data with hosting companies that operate large data centers. I don’t see this trend stopping any time soon, so I see this as a great opportunity.
While I’m admittedly not an expert in understanding the inner workings of a business and predicting future success, DLR seems like a solid company. Sales and earnings have been growing over the past 5 years and are projected to continue doing so. The current dividend yield is 4.57% with a dividend growth rate over the past 5 years of 20.59%.
My next purchase was Senior Housing Properties Trust (SNH), a company that owns 375 properties, primarily senior living facilities, in the US. With an aging baby boomer population, I thought senior living facilities would be a solid investment. It was a tough call for me between SNH and Health Care REIT (HCN), which also owns senior living facilities, but additionally owns many other medical facilities.
HCN is much bigger than SNH and arguably a safer investment. In the end I chose SNH for one reason: while both companies have had similar 5 year dividend growth rates (2.19% for SNH and 2.31% for HCN), and earnings are projected to grow modestly in the next 5 years, HCN’s P/E ratio is too high for my comfort at just over 100. (Oh, and the 7.22% dividend yield for SNH didn’t hurt.) Now I reiterate that I’m no expert, and SNH’s lately stagnant price, which contributes to its lower P/E ratio, may be an indication of trouble, but the company’s recent dividend increase this month offers some confidence that they are doing well. Hopefully this decision will work out in my favor, only time will tell.
Now about Vanguard. They did not make this transaction easy for me. I already had three accounts with Vanguard: one account that holds my mutual funds, a brokerage account that holds my individual stocks (which is connected to a money market fund in my first account), and a Roth IRA that holds my retirement funds. To invest in REITs, I had to open a separate brokerage Roth IRA. No biggie, but I assumed Vanguard would be intelligent enough to recognize that I already had a Roth IRA and open up the required linked money market fund in my existing account. Instead, they opened up another Roth IRA to house to money market fund, so I then had three separate IRAs! My call to the help center was very easy at least, they immediately saw what happened and told me they’d fix it within 24 hours. It actually took them three business days, but at least it’s now fixed. I’m not sure if this is a common problem, the support guy said he’s seen it happen before, but I think I’d recommend that if you’re trying to make account changes and at any point in the process it doesn’t seem intuitive, just call Vanguard and have them do it for you.

2 Responses to New Purchase and a Bit About REITs

  1. I like your strategy with the REIT’s in the IRA. When I purchased NLY I putit in my Roth as well.

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