What is a REIT?
A REIT pools investor capital to purchase and manage real estate properties such as office buildings, apartments, shopping centers, and warehouses. REITs are required to distribute at least 90% of taxable income as dividends, making them attractive for income investors. The average REIT dividend yield is typically 3-5%, higher than the S&P 500 average of around 1.5%.
Types of REITs
Equity REITs own physical properties and earn rental income. Mortgage REITs lend money to property owners and earn interest. Publicly traded REITs offer daily liquidity on stock exchanges, while non-traded REITs are illiquid but may offer higher yields. Sector-specific REITs focus on areas like healthcare, data centers, or cell towers.
Key Considerations
REIT dividends are typically taxed as ordinary income rather than at the lower qualified dividend rate, making them best held in tax-advantaged accounts. REITs are sensitive to interest rate changes - rising rates increase borrowing costs and make bond yields more competitive. A 5-10% allocation to REITs can improve portfolio diversification.