Buyer Beware These High-Yield Stocks
You could get more risk than bargained for with these investments.
If you look at the historical returns for mortgage REITs over the past several years--17.5% five-year compound annual total return for the FTSE NAREIT Mortgage REIT Index as of Nov. 30, 2006--you'd think that these investments can't miss. However, at Morningstar, we believe mortgage REITs bear significant risk, and we'd advise all potential investors to dig deep before taking the plunge.
What Exactly Is a Mortgage REIT?
Generally speaking, a REIT is a company that invests in income-producing real estate assets--at least 75% of total assets--and distributes a minimum of 90% of its income as dividends. In fact, many REITs distribute 100% of income to avoid corporate taxes. Despite not being taxed at the corporate level, the majority of the dividend paid to shareholders is taxed as ordinary income, which is higher than the normal rate for dividend income. To understand the tax consequences of investing in REITs, we would suggest contacting your tax advisor.
Erin Lash does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.