Who doesn’t want to have their cake and eat it too? Even better; all the taste and none of the calories!

When it comes to investments, we would like high yield, high growth and iron-clad safety. Unfortunately, only a few of us got to have our cake and eat it too in the past 15 months.

You could even say that with the Dow (AMEX: DIA) and S&P 500 (AMEX: SPY) down over 45%, the little bit of cake we might have had at one time, was taken away.

One gift of tougher times is higher dividend yields. As stock prices have fallen, dividend yields have gone up. Double digit dividends paid from the real estate and financial sector (NYSEArca: XLF) are particularly tempting.

The iShares FTSE NAREIT Retail ETF (NYSEArca: RTL) pays a stunning 11.01% dividend. This sounds lovely, but where is the catch you might wonder. Let’s take a look under the hood and see if this ETF can back up its tasty appearance with solid fundamentals.

Simon Property Group (NYSE: SPG) is not only the largest constituent of RTL (25%) it is also the largest component of the Vanguard REIT ETF (NYSEArca: VNQ), SPDR Dow Jones Wilshire REIT ETF (NYSEArca: RWR) and iShares Dow Jones U.S. Real Estate ETF (NYSEArca: IYR).

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SPG is a Real Estate Investment Trust (REIT). Real Estate Investment Trusts (REITs) are companies that own and often manage income-producing real estate properties such as offices, industrial and commercial space and apartments. REITs have to pay at least 90% of their taxable income to its shareholders. In exchange REITs are given certain tax exemptions.

SPG manages nearly 400 income-producing, mall-like properties in United States, Europe, China, Korea and Mexico. SPG pays a dividend of $3.60 per share. A few months ago, at $100 a share, that translated into a dividend yield of 3.6%. At today’s $43 a share, SPGs dividend yield is nearly 8.39%. If you owned SPG all along, your dividend yield doubled in exchange for a $55 capital loss.

Diversified Realty Corp (NYSE: DDR) is another top holding of the iShares FTSE NAREIT Retail ETF. Diversified Realty, also a REIT, owns and manages some 400 shopping centers. In fact, DDRs shopping centers were the proud home of 50 Circuit City stores (NYSE: CC). As Circuit City is in the process of liquidating, DDR will have a hard time replacing the income stream generated by Circuit City.

DDRs shares plunged from above $60 a share to below $2 a share. At $4.88, DDRs dividend yield clocks in at 56.44%. The first thing that comes to mind is: “When it sounds too good to be true, it probably is too good to be true.”

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What is a reasonable mid-point between yield and risk? Finding a fundamentally sound ETF (if you believe in a recovery in real estate) is a daunting task. In addition to domestic ETFs, there are international real estate ETFs (NYSEArca: RWX) and short ETFs like the ProShares Ultra Short Real Estate ETF (NYSEArca: SRS).

The February issue of the ETF Profit Strategy Newsletter lists all real estate and REIT ETFs along with 2008 performance, current yield, expense ratio and asset size of the ETF.

Many analysts have been talking about a 2009 recovery of the real estate sector. According to their thesis and based on the notion that the stock market tends to anticipate moves in the market about six month in advance, right about now is a good time to buy real estate.

A marketing campaign by the National Association of Realtors (NAR) conveys the same sentiment. Does the NAR have a track record of correctly predicting market movements? Look for yourself: A headline of a NAR press release in December of 2007 read: “Existing-home sales to trend up in 2008.” Statistics show that existing home sales dropped to an eleven year low in 2008

According to a MSNBC report from January 25, 2007, David Lereah, chief economist at the National Association of Realtors, was quoted: “With fingers and toes crossed, it appears that we have hit bottom in the existing-home market.”

More reliable than advice from associations that benefit from increasing real estate sales, are solid facts and numbers. The international Council of Shopping Centers estimated 5,770 store closings in 2008 compared to 4,603 in 2007. By some estimates, there are about $400 billion in commercial real estate loans maturing in 2009. I can’t think of a bank that would want to add more risky loans to their book of business.

Regardless of the headlines and statistics, many investors feel that the 24% drop in U.S. home prices in itself serves as a basis for a historic buy signal. A look at recent history proves that buying at 20% dips would have served you right. However, at no time since the great depression, did a real estate correction coincide with a stock market meltdown, deflation and 2.3 million lost jobs.

Sub-prime mortgages, the instigator of real estate and stock market meltdown, are considered the first wave of write-downs banks were forced to take. While the effects of the first wave are still stuck in the system, the next wave is approaching quickly.

According to a study by Credit Suisse, this wave is expected to hit the fan in 2009. Furthermore this wave is expected to cause more casualties than the first wave. The recent issue of the ETF Profit Strategy Newsletter includes an in-depth analysis of the second wave along with an ETF that stands to benefit hugely. The ETF is already up 10% since our recommendation on December 24th, 2008 with much more gains to come.