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Wednesday, October 13, 2004

How REITs are helping me reach my IRA goal

As mentioned before, my goal is to accumulate enough shares of REITs in my Roth IRA so that the dividends they pay equal the amount the IRS allows me to contribute to it. For example, for 2004, the IRS allows me to contribute $3,000 to my Roth IRA, so I want to own enough stock to receive $3,000 in dividends. That, combined with my own $3,000 creates $6,000 flowing into my tax-free retirement account, double the amount the IRS allows me to contribute directly.

Let me first say, this is a purely arbitrary goal. I picked the 2X factor out of thin air. However, it presents a satisfying mental image to me. It’s like other companies are matching my contributions dollar for dollar.

This is also not an easy goal to reach. Obtaining $3,000 of dividends requires $30,000 of stock, assuming a 10% ROI, or yield, as it’s called in reference to stock dividends. Furthermore, the Roth IRA contribution limit changes each year. In 2005 through 2007, the limit will be $4,000. In 2008, it rises to $5,000. This means my goal is constantly moving upwards. Also, since I am limited to how much money I can put in each year, I am limited as to how much I can increase my dividend each year and thus, how fast I can reach my goal. Luckily, my REITs have dividend reinvestment plans, so I can harness the power of compounding.

Currently, I am almost 65% of the way to my goal: my Roth IRA is receiving a total of $1,900 in dividends a year from my REITs.

Here are my top three REITs:

SFI (iStar Financial) – This is the financially strongest REIT I have in my portfolio and the one I have held the longest. They currently are paying out $2.79 per share a year in dividends. The stock price, as of this writing, is $42.66, giving a yield of 6.5% - somewhat low by my standards. However, I started buying this stock back in 2001, when it was priced around $22, giving a yield that was closer to 11.5%. Since then, the CEO has been striving to get this stock rated “investment grade”, thus bringing it to the attention of the large mutual funds. He succeeded and the higher stock price reflects it. This company has increased its dividend every year since 1998, the first year it was a publicly traded company. iStar is a finance company focusing on commercial real estate loans. My annualized return is 27%. My total return on this stock, (change in share price plus dividends for the entire time I have held it) is 60%.

ANH (Anworth Mortgage Asset) – They are paying out a $1.32 dividend and their share price is currently $11.35, giving a yield of 11.6%. The company buys single family, adjustable and fixed rate mortgages on the secondary market that are guaranteed by the government or agencies such as Fannie Mae and Freddie Mac. Their dividend history is a bit more erratic than SFI’s, ranging from $2.00 a share to $1.32 a share over the last two years. This stock bears watching, as the company will be affected by changes in the Fed’s interest rate and possibly any problems that might turn up in the Fannie Mae and Freddie Mac investigations. My annualized return is -9.9% and my total return is -11.8%. The loss is mainly due to the drop in stock price – it has fallen a couple of bucks from where I first bought it. However, I am holding this stock for the dividends and they have so far cut my actual losses in half – I’ve lost about $2,000 via the drop in stock price but gained $1,000 in dividends. Since this is in my retirement account, I am comfortable holding on to it for a while and letting the cash income from the dividends help offset the share price drop. (That the price appears to have stabilized makes this a bit easier.)

AIGYX (Alpine Realty Income and Growth) – This is a mutual fund from Alpine that invests in dividend paying equities and securities which are principally engaged in the real estate industry. (While not technically a REIT, this mutual fund invests in them and pays dividends like them, so that’s how I think of it.) It has a 5 star Morningstar rating and has a “low” risk rating with a “high” return rating. Year to date (through August, the latest figures available), it has earned 12.4%. In both 2000 and 2003, it returned over 30%. In 2001, it returned 12.6%. Since this mutual fund can buy REITs, there is some overlap here with the individual stocks I own. For instance, this fund’s top holding, accounting for 4.35% of the fund’s assets, is SFI, which I also own outside of this fund. This bears watching because a serious problem with SFI can hurt me doubly bad. I just got into this fund a couple months ago. My annualized return is 11.6% and my total return so far is 6.3%. If you buy this fund through Schwab, there are no fees for buying or selling it.

Note: I am not a registered investment advisor. These are not recommendations to buy or sell any security. Do your own due diligence.

5 comments:

misteropus said...

What are the expenses for AIGYX?

Shaun said...

1% management fee, 0.23% administration fee. Total expense ratio is 1.38%.

Empty Spaces Inc. said...

any company that borrows money at short term rates to lend out at long term rates will become a bad investment. the wall street journal and business 2.0 magazine both cautioned against this.
be careful and good luck!

Justin H said...

Forgive me if this is readdressed in later postings but I'm trying to go through these chronologically.

Current review of SFI shows stock prices has dropped dramatically to around $2.37. Obviously, AIGYX has changed their holdings since they are an actively managed portfolio. Understanding you aren't a professional stock analyst and your reply is only your own opinion, what is your current view of these two stocks? Do you still hold them?

Shaun said...

I still own both of them. SFI appears to be in some trouble though. Not sure it will recover.

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