Do REITs pay dividends? REITs, also known as real estate investment trusts, do make dividend payments to investors. In fact, due to its nature, a REIT must pay at least 90% of taxable income to qualifying holders.
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.
The Benefits of REITs Investing
A REIT often provides diversification to a portfolio that can help manage risk. REITs frequently invest in commercial real estate, offering investors the ability to hold real estate investments without owning the property itself. Unlike buying residential real estate, which requires more hands-on maintenance and upkeep, REITs are hands-off for investors.
Is There a Difference Between REIT Dividends and Stock Dividends?
REITs and stocks can both pay dividends, usually on a monthly, quarterly, or yearly basis. Some investments will also offer special dividends, but they’re unpredictable. There is a difference between the dividends paid by stocks and REITs though.
REITs are in a better tax situation relative to stocks because stocks are taxed twice. First at the corporate level and then again at the individual level. REITs are tax-advantaged at a corporate level, which can allow them to offer higher yields than many equity investments.
Common Types of REITs
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 of any REIT investment, regardless of its type.
Healthcare REITs: Healthcare costs are rising and people are living longer, making healthcare REITs more attractive 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. These tend to perform better when rates are predictable.
Office REITs: Office buildings with long-term lease agreements are the primary focus of these REITs. The best mortgage REITs invest in geographical locations with strong, growing economies.
Residential REITs: These REITs primarily invest in 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.
Retail Property 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 are common types of assets for these REITs to invest in.
The right REITs can offer the income potential of investing in real property without the hassle of managing that property, and they’re especially popular for income investors.
*This post is periodically updated to reflect market conditions.