Investing in REITs 

To be classified as a REIT, a company needs to meet some strict requirements. For example, they have to invest at least three-fourths of their assets in real estate and pay at least 90% of their taxable income to shareholders. If it meets these requirements, a REIT gets a big tax advantage. No matter how profitable a REIT is, it pays zero corporate tax. With most dividend stocks, profits are effectively taxed twice — once on the corporate level, and again on the individual level when they’re paid as dividends.

Since REITs are required to pay at least 90% of taxable income to shareholders, they tend to have above-average dividend yields. It’s not uncommon for a REIT to have a perfectly safe dividend yield of 5% or more, while the average stock on the S&P 500 yields less than 2%. This can make REITs an excellent choice for investors who need income or want to reinvest their dividends and let their gains compound over time.

REITs have the potential for capital appreciation as the value of their underlying assets grow. Real estate values tend to increase over time and REITs can use several strategies to create additional value. They might develop properties from the ground up or sell valuable properties and redeploy the capital. This, combined with high dividends, means REITs can be excellent total return investments. Several REITs have generated total returns that have handily beat the market for decades.

The main reason REITs were created was to allow everyday investors to put their money to work in assets that would otherwise be out of reach. Most people can’t go out and buy a class-A office tower all by themselves. But there are REITs that allow you to do just that. Thanks to REITs, I own a piece of hundreds of shopping malls, apartment complexes & data centers.

Most experts would agree that diversifying your investment portfolio is a good thing. And although REITs are technically stocks, real estate is a different asset class than equities. Real estate tends to hold its value better than stocks during tough economies. And it’s a great way to add steady and predictable income. These are just two of many factors that help offset the inherent risk of an all-stock portfolio.

Buying and selling real estate properties can take a while. On the other hand, REITs are an extremely liquid investment. You can buy or sell a REIT whenever you want with a click of a button. If you eventually need the money from your REITs, it’s easy to free up your cash.