REIT: How to Evaluate Them

REITs are typically seen as the dividend cash cows for a portfolio much in the same way the golden snitch is seen as a win for Harry Potter in a quidditch game. These massive dividend payers are a dime a dozen however and their metrics seem to be all over the place. Why, you might ask? This is because of a number of factors.

The most important factor is that an REIT (Real Estate Investment Trust) is a unique type of investment that is forced by law to pay out 90% of their income received as dividend payments to shareholders. This causes your typical method of evaluation to fail. This is because the P/E ratio and subsequently most other common ratios become affected by the fact that the net income is slashed due to those dividend payments. How then can we tell if the REIT in question is worth our investment?

Collateral Learning

Once in awhile when you're evaluating a stock for purchase, you find something that reminds you that investing is not just about numbers. When you invest, if you do the research that you should be doing, you learn more about the world and various sides of business that without researching you would never have run into without luck. This is because when you start to research a company, you have to really research it. You have to look into the various sides of the business, how they make their money, what affects that income, and if that income will continue. This means you have to understand every side of their business and in that way understand another side of life that you wouldn't normally.

This happened to me just last night when I was digging into ARLP (Alliance Resource Partners L.P.). Their insanely high dividend yield caught my eye and I saw that they were very much on discount. The thing that I liked even more was that their income just kept rising, year after year, without fail. When I normally run into that sort of thing, it means good things for the future. Even though the payout ratio was way over 100% which would normally turn me the other way and running at full speed, it was hard to think about not throwing some money at it because it almost seemed like a sure bet with their income constantly on the rise that they would eventually level that out.

PEG Ratio?

I'm not stupid enough to think that I know everything. Investing is one large process of learning more and more each day if you're doing what you're supposed to be doing. With this being said, I personally have never been one to use a PEG ratio as a unit of measure for the evaluation of a stock. Why you ask? It's because I didn't know what it was, what it was for, and didn't yet know how to use it to my advantage. Being a young investor, I've got lots to learn so I have to take it day by day and subject by subject. As this is the case, let's learn about PEG ratios.

Watch List: Hanover Insurance Group

Hanover Insurance Group (THG) works as one of the many insurance carriers in the USA. They work to insure others by a process of finding clients, underwriting to see if they could be bound for coverage, and ultimately, if approved, bound for coverage by their company for property and casualty insurance. It was founded in 1844 and is based out of their headquarters in Worcester, Massachusetts.

Watch List: Wells Fargo

Wells Fargo is the owner of a large series of multinational banks. They also offer multitudes of financial services to bring in other income. Their services cover basic banking, loans, retirement, and investment options. As one of the big four banks in the USA, they hold a strong national recognition and they will likely withstand the test of time that many banks topple over when faced with adversity.

Watch List: Archer Daniels Midland Co.

ADM is in the major diversified food industry. It provides transport, storage, and production of agricultural items in the United States and a portion internationally. In addition to the creation of vegetable oils, partially refined oils, and other nutrition products, ADM also operates fertilizer facilities and has a stake in the production of bio products with their corn processing segment. The company also dabbles in crop insurance and brokerage services.

Mind Over Mr. Market

Mr. Market, the alter ego of the stock market that decides that some days he wants to move in a thoughtful and meaningful way and on other days crash, burn, and send hell raging through your portfolio. Regardless of what Mr. Market decides to do, it appears to control a certain part of many people's psyche in the wrong direction when he decides to go on his rampage. Due to this control, we need to learn to master our own minds so that we end up running the show rather than him controlling the scene.

What really drives our brains when Mr. Market shows up? There are a multitude of factors. The most important is that we're trained from a very young age that if something works, do more of it to make sure it still feels good. If on the other hand, you place your hand on a hot stove and it hurts, you immediately remember not to put your hand on the hot stove. It only takes once to remember to not place your hand on a

Aim for a Catalyst Stock

I believe that one of the most important things to do when looking for stock to invest in is to specifically try to eye the market for a catalyst stock. By this I mean to say that I watch and listen to the news and whenever I hear or read that a company that was once known and loved has suddenly come under fire for some reason or another, that's enough reason to start looking into the company as a potential investment. The human brain wants to lead you to believe otherwise and the media just eats it up. After all, at the core of everyone is a little beast that loves to start or watch drama unfold.

Watch List: Darden Restaurants

Have you ever been to Red Lobster? Does your mouth salivate at the very thought of those delicious cheddar biscuits? How about Olive Garden's bread sticks? Do you like those? Do you crave them? If the answer is yes and you also possibly enjoy Long Horn Steakhouse or Bahama Breeze, then maybe DRI is your next acquisition. Darden Restaurants owns and operates nearly 1,900 of these locations in the US and Canada and it is the next stock on our watch list to be reviewed.

EPS - Earnings Per Share

Yes, EPS means Earnings Per Share but what does it really mean? EPS is the portion of the profit of a company that is assigned to the share of the company that you are looking into. Basically, it's another good indicator of whether or not the company you're interested in is profitable.

Price to Earnings Ratio - P/E

In my last article, I reviewed the method I use to pick stocks for the Cookie Jar portfolio. One of these items was using the P/E ratio as a factor to determine whether a stock is worthy. Today I want to dive in deeper into P/E ratios: what they are, how to use them, and all in all breaking them down.

My Method of Evaluation

I think the question that I get most from readers is what method of evaluation I use to choose the select stocks that I feel really fit the mold for the Cookie Jar portfolio. After all, it should be the most important question for any dividend growth investor. What really matters to me? What do I hate most and try to avoid?