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Several recent reports have indicated that home prices and sales have bottomed out and now are poised to start marching upward. We have heard that before. Let's hope it sticks this time. Real estate was one of the major contributors to the 2008 financial crisis. Now a rebound is needed to help lead us out of its ugly aftermath: a slow growth, almost stagnant, economy.
How can the individual investor take advantage of this besides buying income-producing property and becoming a landlord?
One of the ways is through real estate investment trusts (REIT).
REIT’s come in many flavors. Some focus on owning tangible assets such as houses and commercial buildings. Agency and mortgage REITS buy debt secured by properties and usually have relatively high yields since they are required by law to pay out most of their earnings in the form of distributions, which are similar to common stock dividends.
You may want to consider a company like Select Income REIT (NYSE: SIR) which primarily owns single tenant commercial office buildings. It is a relatively new company (founded in Dec. 2011) and has reported positive earnings and free cash flow so far. It has a dividend yield of 7.9% and the stock is affordable at a P/E of about 12. It should be poised to take advantage of further improvement in commercial real estate which was growing even before the rest of the real estate market hit bottom.
If you want to look at agency REIT’s and the residential market, one of the current stars is American Capital Agency Corp. (NASDAQ: AGNC). It minimizes risks, in a relatively high risk industry, by holding most of its assets in single family home mortgage debt guaranteed by Fannie Mae and the Government National Mortgage Association. The downside is if Fannie Mae continues to have the same problems that resulted in a takeover by the U.S. government there could be some sort of restructuring of the mortgage business model by a possible new administration and Congress.
AGNC currently yields 14.4%, so it might be good as part of an income producing portfolio, and it has plenty of free cash flow to keep paying the distribution. As long as underlying interest rates remain low, and the Fed has pledged that until at least until 2014, mortgage applications, including refi's, and the company's earnings, should keep increasing. Shares of AGNC are relatively inexpensive with a P/E around 12. It appears there is plenty of upside here.
Besides REIT’s another industry to consider to leverage off the coming boom is home improvement stores. If housing sales increase as expected it is logical to assume that sales of home improvement items will as well.
Both of the major players here are well known to most Americans. They have a good brand.
Let's take a look.
Home Depot (NYSE: HD) survived the housing crunch fairly well. Earnings, free cash flow and the stock price have generally increased over the last several years. A caveat here is that Home Depot shares are relatively pricey with a P/E of about 20.
The other major home improvement company is Lowe's (NYSE: LOW). Its fundamentals are similar to Home Depot. Although earnings and free cash flow have increased lately the stock has been relatively flat over the last few years. It is fairly pricey too with a P/E of about 18.
So let's hope that the bottom has been reached and the boom is for real this time. We can sure use some home improvement.
Mathman6577 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend The Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.