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Real estate shares to benefit as rates fall

Corporate New York skyline
Scott Mlyn | CNBC

With expectations that the Fed will delay an interest rate hike to late 2015 or later, a good play for the present low-yield environment could be shares of real estate investment trusts, analysts and history suggest.

CNBC looked at the 23 periods of time since 1980 when the 10-year yield was between 1.5 and 1.99 percent while stocks outperformed the market. The 10-year yield was at 2.16 percent on Monday down from 2.97 percent to start the year. Many strategists see that lower trend continuing into 2015.

Some of the strongest performers on the Russell 2000 during periods of low interest rates were REITS as investors gravitated to the sector for their high dividend payouts, according to the analysis using Kensho, a quantitative analytics tool used by hedge funds.

Healthcare Realty Trust traded higher during 86 percent of those low-rate occasions, with a median return of 1.6 percent. STAG Industrial, an industrial REIT, traded in the green 82 percent of the time with a median return of 1.8 percent. Commercial property operator Whitestone REIT traded positive 82 percent of the time and had a median return of 1.3 percent.

Real estate investment trusts must pay at least 90 percent of their income in dividends, offering much higher yields than most other stocks.

"The lower interest rates go, the higher the demand for higher dividend stocks," said J.C. Parets, founder and president of Eagle Bay Capital.

He sees the 10-year yield hovering just above or slightly under 2 percent.

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Looking at futures, he said the percentage probability that the Federal Reserve will raise interest rates in mid-October 2015 is "in the low 70s" but economists looking for an increase any earlier will likely be proven wrong, just as they were this year.

REITs may seem like just boring dividend plays, but some can give investors exposure to high growth trends as well. Of the funds MLV senior analyst Jon Petersen covers, he is most bullish on data centers REITs.

"Because (data centers) are tied to the tech sector, they have a lot in common with growth companies," Petersen said.

For example, he has a "buy" rating on data center operator CoreSite Realty Group. The firm announced in early December a 20 percent increase in its dividend, putting its yield at 4.4 percent. But it also posted a 16 percent increase in operating revenue from the same quarter last year, a growth rate that would be the envy of many in the tech industry.

Stag Industrial has a dividend yield of 5.5 percent, above the overall REIT yield of 3.5 percent, according to an Evercore ISI report in which the firm raised its price target and reiterated its "buy" rating.

The Evercore report by Sheila McGrath and Nathan Crossett highlighted the fact that nearly 88 percent of Stag's tenant's businesses had at least $100 million in revenue.

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"STAG is a unique small cap REIT with a niche growth strategy that is scalable," their report said.

Disclaimer

Disclosure: NBCUniversal, parent of CNBC, is a minority investor in Kensho.