- REITs (real estate investment trusts) are common financial entities that pay dividends to their shareholders.
- One disadvantage of non-traded REITs (those that aren’t traded on a stock exchange) is that investors may find it difficult to investigate them.
- Investors find it difficult to sell non-traded REITs because they have low liquidity.
- When interest rates rise, investment capital often flows into bonds, putting publically traded REITs at danger of losing value.
Can you make good money with REITs?
REITs may be a good long-term investment for those seeking growth and dividend income. In the ten years leading up to Aug. 31, 2021, REITs (short for real estate investment trusts) generated a 10.6% average annual return. This compares favorably to the market’s long-term average return of roughly 10%.
REITs are well-known for paying out large dividends, and the cash income can help investors stay afloat during market downturns. They’re popular, especially among elderly investors, because of their payments. REITs are known for having some of the best yields on the market.
Here are five ways to invest in REITs, as well as their benefits and drawbacks.
Is investing in REITs a good idea?
REITs are a significant investment for both retirement savings and retirees who want a steady income stream to fund their living expenditures because of the high dividend income they generate. Because REITs are obligated to transfer at least 90% of their taxable profits to their shareholders each year, their dividends are large. Their dividends are supported by a consistent stream of contractual rents paid by their tenants. REITs are also a useful portfolio diversifier due to the low correlation of listed REIT stock returns with the returns of other equities and fixed-income investments. REIT returns tend to “zig” while other investments “zag,” lowering overall volatility and improving returns for a given amount of risk in a portfolio.
- Long-Term Performance: REITs have delivered long-term total returns that are comparable to those of other stocks.
- Significant, Stable Dividend Yields: REIT dividend yields have historically provided a consistent stream of income regardless of market conditions.
- Shares of publicly traded REITs are readily available for trading on the major stock exchanges.
- Transparency: The performance and prognosis of listed REITs are monitored by independent directors, analysts, and auditors, as well as the business and financial media. This oversight offers investors with a level of security as well as multiple indicators of a REIT’s financial health.
- REITs provide access to the real estate market with low connection to other stocks and bonds, allowing for portfolio diversification.
Why REITs are bad investments?
Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.
The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.
Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.
REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.
Is REIT a good investment in 2021?
Three primary causes, in my opinion, are driving investor cash toward REITs.
The S&P 500 yields a pitiful 1.37 percent, which is near to its all-time low. Even corporate bonds have been bid up to the point that they now yield a poor return compared to the risk they pose.
REITs are the last resort for investors looking for a decent yield, and demographics support greater yield-seeking behavior. As people near retirement, they typically begin to desire dividend income, and the same silver tsunami that is expected to raise healthcare demand is also expected to increase dividend demand.
The REIT index’s 2.72 percent yield isn’t as high as it once was, but it’s still far better than the alternatives. A considerably greater dividend yield can be obtained by being choosy about the REITs one purchases, and higher yielding REITs have outperformed in 2021.
What does Dave Ramsey say about REITs?
Do you want to know more details? Here’s a rundown of some typical investment possibilities, as well as Dave’s thoughts on them—both positive and negative.
Mutual Funds
Mutual funds allow you to invest in a variety of businesses at simultaneously, ranging from the largest and most stable to the newest and fastest-growing. They have teams of managers who, depending on the fund type, select companies for the fund to invest in.
So, why does Dave propose this as the only investing option? Dave prefers mutual funds because they allow him to diversify his investment across a number of companies, avoiding the risks associated with single equities like Dogecoin. Mutual funds are an excellent alternative for long-term investing since they are actively managed by professionals who strive to identify stocks that will outperform the stock market.
Exchange-Traded Funds
ETFs are collections of single stocks that are designed to be traded on stock exchanges. ETFs do not employ teams of managers to select firms for investment, which keeps their fees cheap.
Because ETFs allow you to swap investments quickly and easily, many people try to play the market by buying cheap and selling high, but this is extremely difficult to do. Dave favors a buy-and-hold strategy, which entails holding on to investments over time and maintaining a long-term perspective rather than selling on the spur of the moment when the market falls.
Single Stocks
Your investment in a single stock is contingent on the performance of that firm.
Dave advises against buying single stocks since it’s like putting all your eggs in one basket, which is a large risk to take with money you’re dependent on for your future. If that company goes bankrupt, your savings will be lost as well. No, thank you!
Certificates of Deposit (CDs)
A certificate of deposit (CD) is a form of savings account that allows you to store money for a predetermined period of time at a fixed interest rate. Withdrawing money from a CD before its maturity date incurs a penalty from the bank.
CDs, like money market and savings accounts, have low interest rates that do not keep pace with inflation, which is why Dave advises against them. While CDs are helpful for putting money down for a short-term purpose, they aren’t suitable for long-term financial goals of more than five years.
Bonds
Bonds are a type of debt instrument that allows firms or governments to borrow money from you. Your investment earns a predetermined rate of interest, and the company or government repays the debt when the bond matures (aka the date when they have to pay it back to you). Bonds, like stocks and mutual funds, rise and fall in value, although they have a reputation for being “safe” investments due to less market volatility.
However, when comparing investments over time, the bond market underperforms the stock market. Earning a set interest rate will protect you in poor years, but it will also prevent you from profiting in good years. The value of your bond decreases when interest rates rise.
Fixed Annuities
Fixed annuities are complicated plans issued by insurance firms that are designed to provide a guaranteed income in retirement for a specific period of years.
Dave doesn’t advocate annuities since they can be costly and come with penalties if you need to access your money during a set period of time. You might be wondering what a designated surrender period is. That’s the amount of time an investor must wait before being able to withdraw funds without incurring a penalty.
Variable Annuities (VAs)
VAs are insurance products that can provide a steady stream of income and a death payment (money paid to the beneficiary when the owner of the annuity passes away).
While VAs provide an additional tax-deferred retirement savings option for those who have already maxed out their 401(k) and IRA accounts, you lose a much of the growth potential that comes with mutual fund investing in the stock market. Furthermore, fees can be costly, and VAs impose surrender charges (a penalty price you must pay if you withdraw funds within the surrender period).
Real Estate Investment Trusts (REITs)
REITs are real estate investment trusts that own or finance real estate. REITs, like mutual funds, sell shares to investors who want to share in the profits generated by the company’s real estate holdings.
Dave enjoys real estate investing, but he prefers to invest in cash-flowing properties rather than REITs.
Cash Value or Whole Life Insurance
Whole life insurance, often known as cash value insurance, is more expensive than term life insurance but lasts your entire life. It’s a form of life insurance product that’s frequently promoted as a means to save money. That’s because insurance is also attempting to function as an investing account. When you get whole life insurance, a portion of your “investment” goes into a savings account within the policy.
Sure, it may appear to be a nice idea at first, but it is not. The kicker is that when the insured person dies, the beneficiary receives only the face value of the insurance and loses any money that was saved under it (yes, it’s pretty stupid).
Dave only advises term life insurance (life insurance that protects you for a specific length of time, such as 15–20 years) with coverage equivalent to 10–12 times your annual income. If something occurs to you, your salary will be compensated for your family. Don’t know how much insurance you’ll need? You can use our term life calculator to crunch the numbers.
Separate Account Managers (SAMs)
SAMs are third-party investment professionals who purchase and sell stocks or mutual funds on your behalf.
Simply say, “No thanks, Sam,” to this option. Dave chooses to put his money into mutual funds that have their own teams of competent fund managers with a track record of outperforming the market.
Do REITs pay dividends?
A REIT is a security that invests directly in real estate and/or mortgages, comparable to a mutual fund. Mortgage REITs engage in portfolios of mortgages or mortgage-backed securities, whereas equity REITs invest mostly in commercial assets such as shopping malls, hotel hotels, and office buildings (MBSs). A hybrid REIT is a fund that invests in both. REIT shares are easy to buy and sell because they are traded on the open market.
All REITs have one thing in common: they pay dividends made up of rental income and capital gains. REITs must pay out at least 90% of their net earnings as dividends to shareholders in order to qualify as securities. REITs are given special tax treatment as a result of this; unlike a traditional business, they do not pay corporate taxes on the earnings they distribute. Regardless of whether the share price rises or falls, REITs must maintain a 90 percent payment.
Weak Growth
REITs that are publicly listed are required to pay out 90% of their profits in dividends to shareholders right away. This leaves little money to expand the portfolio by purchasing additional properties, which is what drives appreciation.
Private REITs are a good option if you enjoy the idea of REITs but want to get more than just dividends.
No Control Over Returns or Performance
Investors in direct real estate have a lot of control over their profits. They can identify properties with high cash flow, actively promote vacant rentals to renters, properly screen all applications, and use other property management best practices.
Investors in REITs, on the other hand, can only sell their shares if they are unhappy with the company’s performance. Some private REITs won’t even be able to do that, at least for the first several years.
Yield Taxed as Regular Income
Dividends are taxed at the (higher) regular income tax rate, despite the fact that profits on investments held longer than a year are taxed at the lower capital gains tax rate.
And because REITs provide a large portion of their returns in the form of dividends, investors may face a greater tax bill than they would with more appreciation-oriented assets.
Potential for High Risk and Fees
Just because an investment is regulated by the SEC does not mean it is low-risk. Before investing, do your homework and think about all aspects of the real estate market, including property valuations, interest rates, debt, geography, and changing tax regulations.
Fees should also be factored into the due diligence process. High management and transaction fees are charged by some REITs, resulting in smaller returns to shareholders. Those fees are frequently buried in the fine print of investment offerings, so be prepared to dig through the fine print to find out what they pay themselves for property management, acquisition fees, and so on.
Are REITs good for passive income?
REITs are an appealing investment option for people looking for a source of passive income or for retirees who want a regular income stream due to their dividend payments.
If you’ve listened to our episode on dividend aristocrats, you might be wondering why, if you desire dividends, you shouldn’t invest in those companies.
Is REIT a passive income?
Due to their income tax free status and the requirement that they pass on at least 90% of their taxable income to shareholders, Real Estate Investment Trusts (REITs) are among the best passive income vehicles. Real Estate Investment Trusts tend to pay out much greater dividend yields than your ordinary stock due to their significantly lower tax burden paired with the statutory high payout ratio.
Add in the fact that their fundamental business plan often entails passively renting out very large and varied commercial real estate portfolios, and they can be a stable source of income. When compared to investing in a single rental property, REITs offer a considerably more passive, diversified, and liquid real estate investment option.
For passive real estate investors, the following three high-yield REITs provide exceptionally safe and attractive income.
WPC is perhaps the safest high-yield REIT on the market today, with a 23-year dividend increase run that demonstrates its business model’s steadiness and sturdiness. Furthermore, whereas others saw their cash flow per share collapse in 2020 as a result of the COVID-19 lockdowns, WPC maintained its growth in April and May of that year, collecting an outstanding 96 percent of their rents. As a result, the company efficiently covered its dividend last year and is likely to keep its payout ratio at an acceptable 85 percent this year.
WPC is particularly well positioned to benefit as inflation rises in the future, as 62 percent of their leases are CPI-linked. Their BBB credit rating, real estate sector diversification, and geographic diversification across North America and Europe provide them with capital as well as diverse investment possibilities to maximize cap rate/interest rate spreads.
Finally, W.P. Carey has a strong growth trajectory, with $900 million in acquisitions already planned for 2021, with a weighted average lease term of 22 years. As a result, we anticipate W.P. Carey’s dividend per share to grow for many years to come. Despite these advantages, WPC offers a 5.4 percent yield in an environment when long-term interest rates are all below 2%.
MPW offers investors appealing risk-adjusted income and total return potential by combining excellent yield with strong growth momentum in a conservative sector. In the first quarter, normalized funds from operations (FFO) per share increased by a stunning 13.5 percent year over year. The corporation proceeded to raise large capital through at-the-market sales, which it repurposed into acquisitions for hundreds of millions of dollars.
MPW offers an abundance of opportunities for raising and deploying money to maximize cost of capital and cap rate spreads thanks to its presence in the United States, Germany, the United Kingdom, Italy, and Australia. The company also has a proven track record of success, having more than doubled its FFO per share over the last decade while still paying out and increasing its sizable dividend. In the face of COVID-19 challenges, the REIT showed its mettle by increasing the dividend by roughly 4% and expanding FFO per share by 9% last year.
MPW will likely continue to drive transaction flow in the future by leveraging its position as the only pure-play hospital REIT with many years of experience and a vast network of partnerships. The dividend looks quite appealing and safe right now, with a 5.5 percent yield and a 64 percent anticipated payout ratio for 2021, with lots of room to expand in the years ahead.
SPG is the world’s largest retail REIT, with a portfolio of predominantly class A shopping malls. Despite the fact that the road forward has been difficult in recent years due to the increasing growth of e-commerce, numerous high-profile retailer bankruptcies, and COVID-19 lockdowns, SPG continues to create attractive cash flow for investors.
Their success stems from their diverse portfolio of well-located properties, vast network of existing and potential tenants, and strong financial position. Their balance sheet provides them with a lot of cash and access to low-cost debt, which they can use to renovate their properties and keep them profitable. Many of their retail peers, on the other hand, have fallen by the wayside and, in some cases, have even gone bankrupt as a result of overleveraged financial sheets that have been overwhelmed by bankruptcies and redevelopment demands.
While SPG had to cut its dividend in 2020 owing to the COVID-19 lockdowns, it recently increased it by 8% and now provides investors an attractive future yield of 4.3 percent. The dividend looks highly safe and prepared to continue significant growth, with a payout ratio of 57.4 percent forecast in 2021 and robust FFO per share growth momentum into 2022 on the back of the economy’s re-opening.
While the continuous shift toward e-commerce and away from brick-and-mortar retail clouds its future, SPG has the cash, assets, and network to weather the storm and emerge as the premier retail landlord of the twenty-first century. SPG is poised to stay economically viable and a dividend-paying powerhouse for years to come, thanks to mixed-use redevelopments, judicious asset dispositions, and deeper integration between e-commerce and its increasingly omni-channel properties and tenants.
WPC is a highly-diversified, steady-as-she-goes investment that can help you sleep soundly at night by steadily increasing your dividend income stream over time and weathering economic downturns. MPW is a higher-growth, specialty investment that, while not as safe as WPC, should provide investors with a high total return and income. Finally, SPG presents an appealing contrarian value investment opportunity that, if successful, may provide investors with the highest upside in terms of both share price appreciation and dividend growth.
An equal position in all three REITs yields a 5.1 percent average dividend yield, which is amply covered by a diversified stream of cash flows and is likely to expand significantly in the coming years. Furthermore, WPC, MPW, and SPG each offer something unique to investors, making them an excellent location to begin growing your passive income REIT portfolio.
Which REITs pay monthly dividends?
5 REITs That Pay Dividends Every Month
- Realty Income Corporation (O) is a commercial real estate investment trust that owns around 5,000 buildings with tenants such as CVS Health (CVS) and 7-Eleven.
