Do REITs pay dividends? REITs, also known as real estate investment trusts, do make dividend payments to shareholders. In fact, due its nature, a REIT must pay at least 90% of taxable income to qualifying shareholders.
What exactly is a REIT, though? A REIT invests in real estate like commercial properties and provides ownership to investors who want the benefits of owning property, but also want to avoid the potential hassles associated with owning real estate.
Do REITs pay dividends? Understanding the benefits of owning REITs
A REIT often provides diversification to a portfolio and lower risk. It invests in the ownership or management of commercial real estate, providing investors the ability to hold real estate investments without excessive interaction with the property itself. That is unlike ownership of residential real estate, which requires more hands-on maintenance and upkeep.
REITs are also known to experience capital appreciation more than other investments. This means that the REIT’s market price rises between the time of purchase and the time of being sold, and the capital appreciation is the difference between the two values. For instance, if the price at purchase was $50 and the market price was $60 at the time of selling, then the capital appreciation equals $10.
Do REITs pay dividends that are any better than stock dividends?
REITs and stocks can both pay dividends. This can happen regularly on a monthly, quarterly, or yearly basis. Special dividend payments can also be made throughout the year if certain net profits are reached. There is a difference between the dividends paid by stocks and REITs though, and it is worth understanding the reason for this.
REITs receive a better taxation scenario in relation to stocks because stocks are taxed twice. This is the case because the stock’s earnings are taxed first at the corporate level and then again at the individual level. REITs have one layer of taxation less than stocks, and because of this, REITs may be able to offer higher dividend yields than comparable stock investments.
Any dividend generated by a REIT does so through cash flow from contractual lease agreements. Investors can look at the leases involved in the REIT to have an understanding of whether or not the REIT is likely to continue dividend payments in the future.
Recognizing types of REITs for industry inclusion
There are a few different types of REITs that investors can buy. Here is a brief look at each type of REIT. It is important to remember that a strong balance sheet and low amounts of short-term debt are worthy components to any REIT investment, regardless of its type.
Healthcare REITs: Healthcare costs are rising and people are living longer, making healthcare REITs an interest to many American investors. These REITs hold real estate in hospitals, medical centers, and nursing homes. The greater the demand for healthcare, the better positioned these REITs will be in the market.
Mortgage REITs: A small subset of REITs focus on mortgages instead of real estate equity. The top investments in this subset are found in environments with low-interest rates.
Office REITs: Office buildings with long-term lease agreements are the primary focus of these REITs. The best mortgage REITs are in geographical locations with strong, growing economies.
Residential REITs: These REITs primarily involve multi-family rental properties and manufactured housing. It is worth considering the area where the residential property is located before investing in residential REITs. It is best to target geographical locations that have a strong job market, a growing population, and a housing market where supply is low and the demand is high. Large cities are home to some of the largest REITs.
Retail REITs: These REITs are popular among investors and nearly a quarter of all REIT investments involve retail properties. Shopping malls, grocery stores, and home improvement stores all fall into examples of properties owned under REITs. The best retail REITs will include commercial stores that are profitable without any cash flow problems.
Invest in the right REIT and you’ll be holding a low risk, diversified investment that can pay dividend income.
Would you invest in an REIT over other forms of real estate investing?
*This post has been updated from a version published in 2021.