Are REITs good for a portfolio?
Real estate investment trusts (REITs) are a key consideration when constructing any equity or fixed-income portfolio. They can provide added diversification, potentially higher total returns, and/or lower overall risk.
In the past two decades, market research and academic literature have suggested that adding REITs to a mixed-asset portfolio offers diversification benefits over long time horizons, primarily because of a low correlation with the U.S. stock market since the late 1990s.
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
REITs have outperformed the S&P 500 over the past 20-, 25-, and 50-year periods. Stocks have delivered higher returns in recent years, with the S&P 500 beating REITs over the previous one-, five- and 10-year periods. However, the overall data shows that REITs have outperformed stocks over the long term.
The generous dividend payments enjoyed by REIT investors may look particularly attractive moving forward. With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts.
The value of a REIT is based on the real estate market, so if interest rates increase and the demand for properties goes down as a result, it could lead to lower property values, negatively impacting the value of your investment.
Because the REIT manages the property, investors are not burdened with the everyday stress of vacancies, tenants, management or repairs. REITs also pay out dividends to investors, providing a reliable passive income stream.
REITs allow investors to pool their money and purchase real estate properties. By law, a REIT must pay at least 90% of its income to its shareholders, providing investors with a passive income option that can be helpful during recessions.
Any increase in the short-term interest rate eats into the profit—so if it doubled in our example above, there'd be no profit left. And if it goes up even higher, the REIT loses money. All of that makes mortgage REITs extremely volatile, and their dividends are also extremely unpredictable.
REITs historically perform well during and after recessions | Pensions & Investments.
What is the average return on a REIT?
Over a 15-year period, according to Cohen & Steers, actively managed REIT investors realized an annualized 10.6% return. Of the other active strategies, opportunistic real estate funds placed second, at 9.8%. Core and value-added funds had average annualized returns of 6.5% and 5.6%, respectively, over 15 years.
Average ROI in the U.S. Real Estate Market
Residential properties generate an average annual return of 10.6%, while commercial properties average 9.5% and REITs 11.8%.
Data dug up by our research team suggests that in the long run, when factoring in their dividend payments, REITs actually outperform the S&P 500 by an average of about one percentage point per year.
A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.
Equity Residential is a multifamily residential REIT that owns and operates a diversified portfolio of apartment properties. Brown says Equity's 2024 guidance suggests same-store revenue growth of between 2% and 3% in 2024, compared to previous Morningstar estimates of 5.4% growth.
Here are 3 REIT stocks for investing. Dennis Mitchell, CEO and chief investment officer at Starlight Capital, joins BNN Bloomberg for his top 3 REIT stocks for investing. His ideas include residential, retail and industrial real estate.
While a REIT is still open to public investors, investors may be able to sell their shares back to the REIT. However, this sale usually comes at a discount; leaving only about 70% to 95% of the original value. Once a REIT is closed to the public, REIT companies may not offer early redemptions.
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
Often, the bulk of REIT dividend payouts consists of the company's operating profit. As a proportional owner of the REIT company, the shareholder receives this payout as ordinary income and will be taxed at the investor's marginal income tax rate as nonqualified dividends.
REITs provide a much simpler way to invest in real estate and earn consistent income through dividends, but they confer less control, and their upside tends to be lower than that of rental properties.
Are REITs safer than stocks?
If you are interested in a real estate investment that is reliable, hands-off and offers dividends, REITs could be the answer. If you're looking for a higher-risk – but high-potential – investment or want to be able to invest in specific companies you admire, buying individual stocks could be the answer.
Extensive reliance on borrowing - As noted earlier, mortgage REITs tend to utilize a higher percentage of leverage (borrowing to fund operations) than most equity REITs; we believe this higher leverage can represent a higher level of risk, especially if interest rates rise quickly and/ or access to debt becomes ...
REIT Stock Performance and the Interest Rate Environment
Over longer periods, there has generally been a positive association between periods of rising rates and REIT returns. This is because rising rates generally reflect improvement in the underlying fundamentals.
REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.
REITs provide natural protection against inflation. Real estate rents and values tend to increase when prices do. This supports REIT dividend growth and provides a reliable stream of income even during inflationary periods.
