3 REIT Stocks To Add As U.S. Treasury Yield Falls

When the Federal Reserve recently deviated from its near-about-a-decade-long stance of protective quantitative easing policy and raised the target funds rate by quarter of a point, it was expected that this uptick would lead to capital flight from the interest rate-sensitive sectors like real estate investment trust (“REIT”).

But things were cropping up elsewhere and amid the erratic developments in the economy, right from the persistent fall in oil price, economic slump in China and uncertainties associated with the potential impact of future interest rate movements on the U.S. economy, investors looked for safer havens, particularly toward the security of government bonds. However, higher demands eventually resulted in lower Treasury yields, with the rate currently standing at 2.12%, lower than 2.29% yield on Dec 16, 2015, when the Fed raised rate.

Amid this, REITs are once again back in the spotlight. This is because, they are often treated as bonds for their high dividend paying nature and therefore, treasury yields end up playing a significant role in their price movement, with REIT stock yields becoming more attractive when treasury yields fall.

In fact, government regulations mandate the REITs to disburse at least 90% of their taxable income in the form of dividends to shareholders in each year. This dividend-paying criterion has been a major reason for their attractiveness.

Therefore, even though the rate hike move by the Fed have raised concerns for this capital-intensive sector, raising the borrowing cos, the recent movements in the treasury market have surely come as a boon for this sector. This is because, lower treasury yields have essentially reduced the incentives of flying away from the high-dividend paying REITs to the safety of Treasury bonds. Amid this backtracking to the REITs and scouting for stocks with better fundamentals and dividend seems to be an apt choice.

Stocks to Consider

As such, we have selected REIT stocks with a favorable Zacks Rank, as a Zacks Rank of #1 (Strong Buy) or #2 (Buy) indicates higher chances of outperforming the market over the next 1–3 months. Along with high ranks, we looked for stocks with robust value potential and for that we relied on our style score system, according to which a stock with favorable Zacks Rank and Zacks Value Style Score of ‘A’ (or ‘B’) is highly desirable.

We have specifically considered only those stocks which have a dividend yield of more than 6%, well above the average industry dividend yield of 4.75%. Finally, we zeroed in on stocks with P/E ratio at a good discount to the industry average of 12.51, rendering their valuation all the more attractive (also read: 5 Top-Ranked REITs on Sale: Should You Buy for 2016? ).

Here are three such stocks for your consideration:

Ashford Hospitality Trust, Inc. (AHT - Snapshot Report) is a Dallas, TX-based hotel REIT which is engaged in investment and management of properties in the hospitality sector.

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