by David Fessler, Investment U's Advisory Panelist
If you're among the many millions of baby-boomers approaching retirement, there's an excellent chance that you've focused your investment portfolio heavily towards one main investing theme: Income.
But the ballgame has changed significantly.
Not so long ago, traditional income-based investments like high-yield savings accounts, bank CDs and U.S. Treasuries were the most popular choices.
But these days, those choices are akin to dumping your money in the living room and staring at it, in hope that it will somehow multiply.
Income from them won't even feed your pets, let alone allow for a comfortable retirement.
But here's an investment that will – my big income idea for 2011…
REITs… Wall Street's New Investment Gem
It's no surprise that Real Estate Investment Trusts – better known as REITs – are quickly becoming Wall Street gems among in-the-know investors. After all, REITs boast some of the highest yields on the market and were one of the best-performing areas in the financial sector last year.
For example, the Vanguard REIT ETF (NYSE: VNQ) – which holds nearly 100 different REITs – closed out 2010 with a respectable 24% gain. That's in stark contrast to the broader financial sector, which pretty much flat-lined during 2010.
For 2011, I expect REITs to perform in a similar fashion as last year, while churning out large dividends. Why? Cheap money…
What Makes REITs Such Great Investments?
When interest rates are low – as they were last year – REITs can make a killing. In fact, some are paying over 19% interest to shareholders.
So how do REITs offer the kind of killer returns we're talking about?
Their business model is quite simple:
- They borrow money using low-interest, short-term securities.
- Then they use those funds to purchase high-interest, long-term assets.
- Investors pocket the difference, known as the "spread," which can be substantial.
As long as interest rates remain low, they can continually refinance their short-term borrowings, thus boosting their profits and dividend payouts for shareholders. And the consensus is that interest rates will remain low.