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Even great stocks hit down cycles that diminish their value and knock down returns. This explains the importance of diversification. Unfortunately, that isn't as easy as it seems because investors have so many offerings to choose from, and tracking an entire portfolio of different stocks is exhausting. Keep reading to learn how to diversify your portfolio and earn a 6% dividend with one single investment.
One of the major strengths of real estate investment trusts (REITs) is that they consist of a wide range of assets, which helps minimize investor risk. However, one risk many REITs share is that many focus on one sector of the real estate market. That means the portfolio's diversification is limited to like-for-like assets in the same sector. This leaves many REITs vulnerable to sector-wide disruptions or downturns.
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Enter the diversified REIT. A diversified REIT delivers investor returns through rental income or property appreciation, just like a single-sectorREIT. However, diversified REITs hold assets across multiple real estate market sectors. A diversified REIT could have a nationwide portfolio of assets in the multifamily, commercial, industrial, storage, or medical sectors or a mixed asset portfolio in the same geographic market.
Theoretically, this diverse allocation of assets in diverse markets limits investor exposure to sector-specific downturns that threaten traditional REITs. It also allows diversified REITs to increase investor returns by featuring triple net lease assets and other investor-friendly properties in the portfolio. That means some diversified REITs pay dividends comparable to the highest-performing single-sector REITs in the business.
One such diversified REIT is WP Carey (NYSE:WPC). This diversified REIT operates in several different sectors and has an operation broken down into multiple segments. The real estate division has long-term, single-tenant commercial leases at office and industrial properties across the globe. The other segment of their operation is the Investment Management Unit, which provides consulting and fee management of assets for other REITs.
Making Money With W.P. Carey
Benzinga estimates W.P. Carey's market cap to be $12.45 billion, and its shares are currently trading at $56.88. That's all while offering a solid dividend of 6.11%. You can potentially earn $1,000 in passive income by investing in W.P. Carey. At the $56.88 share price and 6.11% dividend, W.P. Carey is paying investors $3.47 per share. This means you would need to purchase 289 shares of W.P. Carey stock for $16,438.32 to earn $1,000 in annual dividends.
Upping your investment amount would theoretically lead to more passive income. Here is where it's important to understand the risks of diversified REITs. Although they do feature diversified portfolios or multiple revenue streams, it would not be advisable to overexpose your portfolio to a diversified REIT (or any other offering). So, don't just assume you have "diversified" your portfolio by allocating a large amount to a diversified REIT. That would defeat your purpose.
Beyond Public REITs
High-yield REITs aren't your only option for diversification in this current market. Another way to make high yields in this current market is to take advantage of the private credit boom. One option is the Arrived Homes Private Credit Fund, which provides access to a pool of short-term loans backed by residential real estate with a target 7% to 9% net annual yield paid to investors monthly. It paid 8.1% in July. The best part? Unlike other private credit funds, this one has a minimum investment of only $100.
Both options have their pros and cons. The individual assets in diversified REITs are subject to market forces like oversaturation, interest rate hikes, and lower-than-expected occupancy rates. Diversified REITs’ heavy focus on paying high investor dividends is a double-edged sword. The dividends are great, but they can also be shrunk (or suspended) if multiple assets across the portfolio face difficulties.
With private credit funds like the Arrived Homes offering, the risk is a matter of trusting that the loans in the fund are secure. The Arrived Private Credit Fund is a mortgage REIT that buys loans, and investors are equity shareholders in the REIT. When you invest in real estate debt, you are lending money to a property owner. The risk is that the property owner can’t pay back the loan. The Arrived Homes Private Credit Fund offers a diversified portfolio of loans to help mitigate that risk.
Both diversified REITs and private credit funds are not "low-risk" or "no-risk" investments. They are investments that offer comparably lower risk than simply buying one REIT or stock share. The risk is always present, but that's also where the upside comes from. A diversified REIT of a private credit fund might suit you if you're comfortable with both sides of that equation.
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A billion-dollar investment strategy with minimums as low as $10 — you can become part of the next big real estate boom today.
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This article Want To Earn A Dividend Over 6% While Also Diversifying Your Portfolio? Here Are Two Ideas. originally appeared on Benzinga.com