Real Estate Investment Trusts (REITs) are required by law to pay 90% of their taxable income as dividends.

In return, REITs can deduct shareholder dividends from their taxable income, so most REITs wind up paying little or no taxes. The only downside to this is that REIT dividends are taxed as ordinary income at the investor’s marginal tax rate rather than the lower dividend rate.

#-ad_banner-#There’s no free lunch.

REITs must also pass another test: At least 75% of their holdings must be real estate-related assets.

The U.S. is home to 191 REITs. Twenty yield 10% or more. But many of these REITs may have trouble keeping their dividends at this level.

Of the 20 high-yielding REITs, seven have failed to make a profit in the past 12 months. Unprofitable REITs can hardly be considered safe investments.

Additionally, I’m not interested in REITs that trade on the Pink Sheets. If I were looking for penny stocks, that might be a good place to look. But for any investors looking for safe income, it’s best to exclude any REITs not listed on the major exchanges.

Here’s our initial screen: profitable, exchange-listed REITs that yield above 10%.

Company	Ticker	Yield
American Capital	AGNC	18.8%
Anworth Mortgage	ANH	15.6%
Capstead Mortgage	CMO	14.5%
Annaly Capital	NLY	14.1%
Hatteras Financial	HTS	13.9%
MFA Financial	MFA	12.0%
Walter Investments	WAC	11.1%
Dynex Capital	DX	10.7%
Northstar Realty	NRF	10.4%
Medical Property	MPW	10.1%

That narrows the field significantly, but even at 10, we might as well just buy an REIT index. There are a few more tools we have to weed out potential dangers and find the best REIT in America.

• Growing Dividends, Growing FFO

While a company that has cut its dividend in the past year might be fine now, it’s still could have lingering problems. I want companies that have grown their dividends during the past year by +10% or more.

To support a growing dividend, a REIT needs to have growing funds from operations, or “FFO.” This is calculated by adding depreciation and amortization — two noncash charges — back to net earnings. It’s often what financial websites use for earnings and EPS (on a per share basis). So I’m going to add another requirement: FFO growth of +10% or more in the past year.

That narrows the list to our top three:

Company	Ticker	Div. Growth	FFO Growth
American Capital	AGNC	40%	300%
MFA Financial	MFA	25%	23%
Annaly Capital	NLY	26%	19%

Each of three of these REITs was discovered by High-Yield Investing’s Carla Pasternak well before I found them. Since she brought them to the attention to the attention of her subscribers earlier this year, MFA has gained +48%, NLY has gained +51%, and AGNC has gained +120%.

To see how you can join Carla in her search for the world’s best income investments, go here.