Traders discussing trading strategy for better profit
We contrarians love a beaten-up corner of the market—especially these days, when cheap stocks (and funds) are so thin on the ground.
Right now, real estate investment trusts (REITs) are that corner of the market: unloved, cheap and boasting high, stable dividends. And they have even more appeal with interest rates stabilizing and likely to move lower over time.
We’re not taking advantage of this opportunity by purchasing our REITs individually or through an ETF, though. Instead, we’re looking to REIT-holding closed-end funds (CEFs). These income machines, kicking out 8%+ dividends, are no less than my top contrarian income plays for 2025.
Let’s delve into the (fading) headwinds that are dogging REITs. Then we’ll delve into one of my top picks among REIT CEFs: a holding of my CEF Insider service that’s:
- Cheap now, with a 4% discount to net asset value (NAV, or the value of its underlying holdings) that’s shrinking.
- Paying a high dividend that’s grown: This 8.5% payer hiked its payout in 2023, and I expect more in the years ahead.
Before we get to that, let’s talk about the reasons for real estate’s struggles, which are pretty obvious, ranging from a shock rise in interest rates to come-out-of-nowhere trends like the pandemic shift to work-from-home.
The go-to REIT index fund, the SPDR Dow Jones REIT ETF (RWR), has fallen by about 1% over the last three years in response, far below the fund’s 8.6% average annual return since inception.
Also, keep in mind that this 8.6% annualized gain includes the big drop from the subprime-mortgage crisis, which still wasn’t enough to keep REITs’ momentum from slowing over the long term.
The fact that REITs are lagging the market by a wide margin now, and have been for a period of years, tells us this is a strong buying opportunity, especially with the 8.5% yield on offer from the REIT CEF we’ll get to in a bit.
Look to CEFs for Superior Yields (and Sweet Discounts, Too)
Sure, plenty of investors buy individual REITs on the open market. But buying our REITs through CEFs lets us diversify across the sector all in one go. And REIT CEFs deliver yields that are about double what you’d get from most individual REIT stocks—typically around 7% to 9%.
On top of that, CEFs often trade at discounts to net asset value (NAV). That’s another way of saying our CEFs let us buy REITs for less than we’d pay for them on the open market. ETFs and mutual funds can’t match these deals.
So with that all said, let’s take a look at that CEF we’ve been touching on throughout this article so far—it checks all the boxes we’re looking for here.
RLTY: A Deep-Value CEF Kicking Out an 8.5% Yield
The Cohen & Steers Real Estate Opportunities and Income Fund (RLTY) is a young fund, having only been launched in 2022. That youth is partly why it has consistently traded at a discount (which sits around 4% as I write this): CEF investors are conservative, and they generally favor funds with long histories.
What we really like from this monthly payer is that it’s not only kept its dividend steady—it’s even rewarded us with a 5.8% hike, announced in June 2023. RLTY yields a rich 8.5% today.
RLTY is run by top talent at real estate investor Cohen & Steers. And they’ve packed the fund’s portfolio with top-quality REITs. One of its largest positions is in American Tower (AMT), a cell-tower owner that benefits from our bottomless demand for data.
Another key holding is Welltower (WELL), which profits from rising demand for senior housing. Digital Realty Trust (DLR), a giant in the data-center space, is also a top holding, benefiting from the surge in cloud computing and AI’s thirst for ever more computing power.
Of course, RLTY has also gained as interest rates have stabilized in the last couple years, as well as the fading work-from-home trend and surging demand for computing and infrastructure as a whole.
Despite all that, commercial REITs remain cheap, setting us up for gain potential while we collect the fund’s rich 8.5% payout.
RLTY also highlights our proven CEF Insider service strategy: Buy CEFs at an undeserved discount and then sell at a premium, which we plan to do when RLTY’s premium grows especially large. That day does still look like it’s a ways off, but the fund’s discount has narrowed over the last couple of years. That suggests the market is beginning to pick up on this high-quality fund.
Fortunately, there’s still time to buy at a decent discount and start collecting RLTY’s strong 8.5% income stream while we wait for its sizable premium to appear.
Michael Foster is the Lead Research Analyst for Contrarian Outlook. For more great income ideas, click here for our latest report “Indestructible Income: 5 Bargain Funds with Steady 8.6% Dividends.”
Disclosure: none
