After spending 1998-99 in the investment doghouse, real estate investment trusts are back. Last year, the Morgan Stanley REIT Index posted a 26.8 percent total return. This year, through late August, it chalked up a 13.4 percent total return. Not too shabby any year, but amid the broader market's losses, REITs look downright fantabulous.

No one expects REITs to keep up this pace indefinitely. Nevertheless, there's a case to be made that unlike previous run-ups, this time the stocks may hold investors' attention for a good long while.

After seven interest rate cuts this year (with an eighth possible), the 6.7 percent average dividend yield (as of late August) for the 109 companies comprising the Morgan Stanley REIT Index looks darn good to a growing number of investors.

There has, of course, always been a yield-conscious segment of the investing public. Utility and equity-income funds, for instance, have always catered to this crowd. Now, however, there are signs that the universe of yield-conscious investors may get larger. In fact, dividends might just become "the new, new thing."

In The Wall Street Journal, Jonathan Clements recently noted that Jeremy Siegel, a finance professor at The Wharton School and author of Stocks for the Long Run, argues that while it is unlikely that the Standard & Poor's 500-Stock Index will continue to deliver the sort of returns it did last year and thus far in 2001, it may not improve as much as investors hope.

In his book, Siegel noted that stocks have historically delivered seven percentage points a year more than inflation, Clements wrote. "But in the years ahead, [Siegel] figures returns may be less generous, and possibly as little as five percentage points a year above inflation. Add that to a 3 percent inflation rate and stock returns could come in at 8 percent a year over the next decade, well below the 18.2 percent a year notched by the S&P 500 in the 1990s," Clements added.

Let's suppose Siegel is correct. Then add recent comments by Arnold Kaufman, editor of Standard & Poor's investment newsletter, The Outlook. He remarked that 2001 will see one of the largest dividend drops on record for the S&P 500. Keep in mind that the current yield on S&P's flagship benchmark is a "whopping" 1.35 percent.

Now, consider the possibility that investors conclude that one of the best bets is a sector likely to deliver on average, high single-digit to low double-digit total returns over the next five to 10 years-a sector that also provides a large part of that return as dividends that are likely to continue to increase at a modest clip and have a solid cash cushion backing them.

If that's the case for even a modest chunk of the investing public, REITs could continue to "rock" for a while longer, perhaps long enough to make it to the other side of the current economic slowdown, when, by all accounts, REITs would really be rockin'.

It's just a thought!

September/October 2001 Property Volume VI, Number 2
ISSN: 1529-2398