From a small northwestern observatory…

The “headline” in Erika Morphy’s piece in GlobeSt.Com this morning was that was that REITs underperformed the S&P 500 for August and September.  Specifically, REITs were up 1.85% in the 3rd quarter this year, compared to 6.35% for the S&P 500.  You have to dig a little deeper to get to the heart of the matter, though.

First, let’s remember that investors by-and-large buy REITs as an income vehicle with equity up-side.  The current average REIT yield is 3.88% — not bad, compared to corporate bonds or preferred stocks, and more targeted income seekers can go after single tenant retail with a yield of 5.9%.  (For a great review of this, see a piece by Brad Thomas in Forbes.com from September 10).  Couple those sorts of dividend yields with any upside equity potential, and you have a real investment powerhouse in today’s market.  For comparison, the current yield on the S&P 500 is 1.97%.

But, the news gets better.  For the 12-months ending September 30, the NAREIT index was up 33.81%, compared to 30.2% for the S&P.  Do the math — the total return for a portfolio of REIT shares for the past year would have been (33.81% + 3.88% = ) 37.69%.  The total yield for the S&P 500 would have been (30.2% + 1.97% = ) 32.17%.  Thus, slightly more than a 500 basis point return advantage to REITs.

Of course, (and this goes without saying), past performance doesn’t translate into future returns…..