Real estate investment trusts (REITs) are a key consideration when constructing any equity or fixed-income portfolio. They provide greater diversification, potentially higher total returns, and/or lower overall risk.
Disadvantages of REITs
Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
And higher rates on bonds sometimes hamper the performance of REITs. However, these companies are not created equal. The best REITs for 2019 could benefit from other powerful trends in 2019. ... And mobile-data growth, as well as the rollout of lightning-fast 5G technology, offers potential growth for cell-tower REITs.
Less control: Rental properties offer investors a great deal of freedom and flexibility, accompanied by full responsibility. REIT investors on the other hand, bear only the burden of potentially losing only the money that they've invested. This means that they carry far less risk, but they also have no control.
Investors often purchase REITs for their dividends. ... Everything that could go wrong for REITs in 2020 did. This means, if the vaccine is successful and the pandemic subsides in the second-half of 2021, REITs will be undervalued and should have a strong recovery from depressed levels.
Both REITs and stocks can provide a steady stream of income for investors, but REITs focus more on that aspect than stocks do. ... These payments go to investors in the form of dividends. Similarly, stock shareholders also receive income from their investments through dividends, which are made from a company's profits.
| Best Value REITs | ||
|---|---|---|
| Price ($) | Market Cap ($B) | |
| Brandywine Realty Trust ( BDN) | 13.26 | 2.3 |
| Equity Commonwealth ( EQC) | 28.59 | 3.5 |
| Kimco Realty Corp. ( KIM) | 19.87 | 8.6 |
For context, consider that the average dividend yield paid by stocks in the S&P 500 is 1.9%. In contrast, the average equity REIT (which owns properties) pays about 5%. The average mortgage REIT (which owns mortgage-backed securities and related assets) pays around 10.6%.
REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term total returns of REIT stocks tend to be similar to those of value stocks and more than the returns of lower risk bonds.
As REITs do not pay taxes at the corporate level, investors are taxed at their individual tax rate for the ordinary income portion of the dividend. The portion of the dividend taxed as capital gains arises if the REIT sells assets.
[Update 2021]: The yield on S-REITs are expected to be around the 5-6% level for 2021/22, according to OCBC. For those looking at building a stream of passive income for their retirement years, now might just be the best time to enter selectively into REITs in-lieu of a potential recovery in 2021.
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