A Big Yield with Uncle Sam's "Backing"

09/10/2009 12:10 pm EST

Focus: REITS

Richard Band

Editor, Profitable Investing

Richard Band, editor of Profitable Investing, finds a high-yielding real estate trust that specializes in leasing properties to the government-one of today's few safe bets.

Income investors have had a tough time of it the past two years. First, the financial industry imploded (banks, insurers, etc.), wiping out more than 20% of the dividends paid by companies in the Standard & Poor's 500 stock index.

Then, [Federal Reserve chairman] Ben Bernanke slashed interest rates. Yields on a wide spectrum of fixed-rate paper collapsed-from certificates of deposit (CDs) and money market funds to government bonds. Many investors have concluded, ruefully, that yield and safety don't mix. But that's a mistake.

After searching high and low, I've come up with [a] surprisingly safe vehicle [that offers] a 7% yield going in (with the prospect of "pay hikes" to offset inflation in the years ahead). Investments like this deserve a place in the portfolio of anyone who wants to build a comfortable retirement.

[This vehicle earns its] bread from real estate. At first blush, you might think, "Real estate? Safety? Are you kidding?" As we'll see, though, [this outfit has] put up castle-thick financial walls around [its] business to protect against just the sort of storm we're living through today.

After the steep stock market rally in July and August, most publicly traded real estate investment trusts (REITs) look expensive. As share prices rise, dividend yields fall-a major drawback for folks with new cash to invest. But I've turned up one gem the thundering herd hasn't trampled on yet. It went public only two months ago, so not many analysts have started covering it.

I'm talking about Government Properties Income Trust (NYSE: GOV). This unique REIT specializes in leasing properties to the federal and state governments. As of the June IPO date, the trust held 49 properties, with 45 tenanted by Uncle Sam himself (FBI, IRS, VA, etc.). Needless to say, the Feds never lack money to pay their rent-you and I provide the funds!

Because 95% of the trust's rental income derives from government sources, GOV is far safer than most common stocks. Indeed, I call it a "bond with wings." You earn high, bond-like quarterly distributions; plus, unlike a bond, GOV gives you the opportunity for dividend increases (the "wings") as rents go up. GOV plans to set its initial quarterly dividend rate at 40 cents per share.

At a current share price just above $22, that works out to [more than a 7%] yield-exceptionally generous nowadays for a publicly traded REIT. Grab it while you can! Buy GOV at $21 or less. (Caution: With a typical trading volume of only a little over 100,000 shares a day, GOV qualifies as a small-cap stock. For best results, enter a limit order with your broker, specifying the maximum price you're willing to pay. Don't use a "market" order.)

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