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We Exchanged Our REIT ETF For 4 Great REIT Stocks. But What Took So Long?

Invest in real estate with REIT stocks or REIT ETFs.

Investors invest in REITs for various reasons, including but not limited to portfolio diversification, guaranteed dividend income, long-term capital appreciation, among others. If you are not familiar with REITs, our article on real estate investment trusts should bring you up to speed. Those who do not want to buy physical real estate can go with either REIT ETFs or individual REIT stocks. 

"Ninety percent of all millionaires become so through owning real estate. More money has been made in real estate than in all industrial investments combined. The wise young man or wage earner of today invests his money in real estate

Andrew Carnegie – Scottish businessman and philanthropist

​REIT ETFs vs REIT stocks

Investing in REIT ETFs have advantages and drawbacks. On the one hand, REIT ETFs offer built-in diversification. A REIT ETF is composed of a collection of individual REIT stocks, usually from many different real estate sectors. Moreover, a REIT ETF may include large-cap, mid-cap and small-cap REIT stocks. Despite these great  benefits, the drawbacks of REIT ETFs cannot be ignored.

First, the REIT ETF investor is only limited to buying or selling shares, but has no input over the composition of the REIT ETF itself. Second, it is impossible to separate the bad REITs from the good ones. Moreover, the yield on REIT ETFs, although typically higher than that of the S&P 500 index's average yield of 2%, is not that great. We believe a selection of a few high-quality small cap REIT stocks has the potential to outperform a REIT ETF.

[Related: 3 High-yield Dividend Stocks For the Cheap Investor]

​Why we sold our REIT ETF

Our diversified portfolio consisted of a REIT ETF: the Fidelity MSCI Real Estate Index ETF (FREL). This ETF is made up of 175 individual REIT stocks, and has an expense ratio of 0.08%. Also, the yield on FREL is roughly 3%. We sold all of our 190.17 shares or $5465.60 of the Fidelity MSCI real estate ETF in favor of 4 high-quality REIT stocks on 01/23/2020 to: 1) maximize our returns (price appreciation + dividends); 2) maintain greater control over our investments; and 3) eliminate our 0.08% expense ratio. Here's our 4 picks.

1. Invesco Mortgage Capital Inc. 

Invesco Mortgage Capital Inc (IVR) is a mortgage REIT (mREIT) that focuses on investing in, financing and managing residential and commercial mortgage-backed securities. Based in Atlanta, GA, IVR has a dividend yield of nearly 12% and a market cap of $2.48B. IVR seeks to "deliver competitive returns with consistent dividend income and stable book value". 

2. Landmark Infrastructure Partners LP.

Landmark Infrastructure Partners LP (LMRK) is a "growth-oriented real estate and infrastructure company that acquires, owns and manages a portfolio of real property interests and infrastructure assets that we lease to companies in the wireless communication, outdoor advertising and renewable power generation industries. LMRK is trading at an attractive price of $16.91 and a yield of almost 9%. Landmark is based in El Segundo, CA.

3. Sabra Health Care REIT

Sabra is a health care REIT (SBRA) with strong growth potential. It delivers a yield of over 8%. Based in Irvine, CA, the company is committed to delivering "strong returns to our shareholders by investing wisely in value-creating transactions, actively managing our portfolio, and maintaining financial strength and liquidity."

4. Tanger Factory Outlet Centers (SKT). 

Don't let the slow demise of retail keep you away from enjoying a mouth-watering dividend yield of 8.60% from Tanger Factory Outlet Centers (SKT). Headquartered in Greensboro, North Carolina, SKT operates and owns, or has an ownership interest in a portfolio of 39 upscale outlet shopping centers. SKT recently declared a dividend of $0.355 on 01/09/2020 payable on 02/14/2020.

​Below are two tables outlining our old FREL position and those of our 4 REIT stocks.

REIT ETF Ticker ​REIT ETF Name ​NAV ​Number of Shares​Balance
​FREL ​Fidelity MSCI Real Estate Index ETF ​28.74 ​190.17​$5465.60
REIT Stock Ticker ​REIT Stock Name ​NAV ​Number of Shares​Invested Amount
IVR Invesco Mortgage Capital Inc $17.40 75$1305.00
​LMRK​ Landmark Infrastructure Partners LP $16.91​​80$​1352.80
​SBRA​ Sabra Health Care REIT Inc $22.14​​75$1660.50
​SKT​ Tanger Factory Outlet Centers Inc ​$16.3970​$1147.30​

What's the plan?

We plan on maintaining our positions in these 4 REIT stocks for about 6 months. Afterwards, we will update this article or create a new one. We will crunch the numbers and determine whether ditching our REIT ETF was the right strategy for the real estate portion of our portfolio. We will take into account share price appreciation and dividends. Since we like a good bargain, we will not hesitate to purchase additional shares of any of the 4 REIT stocks, as the opportunity presents itself. But our calculations will be based on data listed above.

The bottom line

REITs have a tendency to provide high dividend income with price appreciation over the moderate to long term. We believe our 4 REITs will outperform our former FREL REIT ETF, in terms of total returns after 6 months. What's your take and prediction? Any other REITs you would prefer or recommend? Please share your thoughts with us in the comments section.

Here are a few other articles you may find useful: 3 large-cap growth index funds for your investment account | How to invest your tax refund | 5 smart investing money moves to make in 2020 | Cash is trash, not king; invest it | How to invest $50.

Disclosure: We are long holder of LMRK, SKT, IVR and SBRA. We wrote this article ourselves. It expresses our opinions. We do not receive compensation from the companies highlighted, nor do we have any business relationships with those companies. All data is current as of 01/23/2020.

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