In A Low-Yield Market, Don't Fall For this Common Investment Trap

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In an ultra-low-yield market like this one, it's not surprising that we get a lot of questions from folks who are seeking high-yielding - but safe - income investments.

A recent note from Private Briefing subscriber Richard P. is a good example.

"Bill: I own a couple MREIT (Mortgage Real Estate Investment Trusts) stocks. They typically have very high dividend yields. Both of them are doing well (over 20% gain in core value), on top of the high dividends they pay.

"I have a few questions about them:

  • What are the risks in holding these kinds of stocks?
  • What economical shifts will affect them down the road?
  • How long should we hold onto them?
  • They seem too good to be true sometimes ... are they?
  • Can you recommend particular MREITs based on the particular company's investments/risks/methodology?"
Great questions, Richard - you clearly put a lot of thought into this and we appreciate you sending them our way.

In fact, I suspect that lots of other income-seeking readers have similar questions.

To get you some answers, I turned to our own Martin Hutchinson, editor of the Permanent Wealth Investor, an advisory service that specializes in income-enhancing strategies.

At a recent Money Map Press strategic planning session. we found a quiet corner to talk this through on one of our breaks.

Here's what Martin had to say...

"Well, Bill, REITs in general are a very good idea right now," Martin said. "But I can't recommend mortgage REITs at this point in time. In fact, they're shaping up as a trap for investors."

It was a stunner of a statement - especially coming from a fairly circumspect guy like Martin. I told him that he just had to elaborate.

"I say that they're a trap for investors because their continued success depends upon [U.S. Federal Reserve Chairman] Ben Bernanke being glued to his seat," Martin said. "By that I mean that they make all their money by borrowing short and lending long. That's a recipe for disaster. When inflation returns, and rates start to shift, they're going to get clobbered - as will the investors who hold them."

But, as Martin said, he does like REITs. And there are two, in particular, that are worth a look.

The first is Omega Healthcare Investors Inc. (NYSE: OHI)

It's a company profiled in an article entitled "The Double Your Money Secret I Learned Over A Few Crab Cakes" that discussed the unseen power of dividends.

This well-run company focuses on a growth business here in the U.S. market - elder care.

"A lot of investors don't realize just how big an investment opportunity senior care really is," Martin said.

He's right. The nation's 90-and-older population nearly tripled over the past three decades, reaching 1.9 million in 2010, according to a joint report released late last year by the U.S. Census Bureau and the National Institute on Aging.

Because of increases in life expectancy at older ages, folks 90 and older now comprise 4.7% of the older population (age 65 and older), as compared with only 2.8% in 1980. By 2050, this share is likely to reach 10%.

Omega focuses on the higher-margin skilled-nursing-facilities market, where the company owns or holds mortgages on 432 properties run by 51 healthcare operators.

And, of course, there's that hefty dividend yield, which is what makes REITS like this one so attractive

Indeed, Omega Healthcare shares currently yield 7.8%. What's more, The company has raised its dividend in each of the last eight years.

If you want a more-conventional REIT, take a look at Agree Realty Corp. (NYSE: ADC), which owns a portfolio of retail outlets. It's up 15% (plus another 7% in dividend payments) since Martin recommended it back on Oct. 5, 2011, in a Private Briefing column that looked at investments with low debt loads.

Wall Street analysts have suddenly become intrigued by the stock, and have slapped on "Buy" recommendations and target prices as high as $30 (33% above where Martin recommended it).

"I like it because it's not-heavily levered," he said. "And it currently pays a 6.1% dividend yield."

Martin is always looking at ways to enhance those yields, and employs a number of those tricks for his subscribers in the Permanent Wealth Investor. Take a look at how he does it here.

But you still have to be careful.

"Like the subscriber said in his query, there are some yields that are literally too good to be true," Martin said. "That either means the company is paying out too much of its profits or cash flow to maintain the dividend, is employing some ill-advised financing strategy or is counting on the current-interest-rate anomaly to continue. None of those three can be maintained for long."

And you don't want to be the one who gets trapped.

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish… and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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