One of the great things about being a dividend investor is that you have a wide variety of options available to you when it comes to earning income from your investments. A reasonable amount of diversity in your dividend portfolio is desirable if you want to improve your overall performance – and see some safety in your portfolio. One way to add a little diversity is to include real estate, with the help of dividend REITs.
REITs: Real Estate Investments – without Owning the Real Estate
Many investors want to include real estate in their portfolios. However, it can be difficult to scrape together the capital it takes to purchase real estate. On top of that, once you purchase some sort of real estate, you are stuck with this huge, somewhat illiquid asset. This is where REITs can help. Real Estate Investment Trusts invest in different types of real estate, and you can get a piece by investing in REITs. The up front capital requirements are much easier to meet, you have a more liquid investment, and you can earn an income through dividends.
REITs are required by law to pay out 90% of their earnings to shareholders. This is often done through dividends, and that means that the savvy dividend investor can benefit.
Why REITs are Attractive
One of the reasons that REITs are attractive is due to their yields. With an average yield of right around 3.7%, REITs fit quite well into many investors’ yield targets. Plus, even though some REITs were hard hit just after the financial crisis, many are showing some improvement. After all, any small change in the real estate market can benefit a REIT.
Plus, it is possible to find REITs that are more “defensive.” Even though single-family housing suffered a huge blow during the recession, multi-family dwellings didn’t do as badly. Indeed, REITs that include apartments can do reasonably well during tough economic times since more people are moving out of homes and into apartments – and people are likely to keep paying rent, even if they skip their credit card payments.
On top of offering reasonable yields, REITs also have performance on their side. Even though the last three years have been kind of tough for REITs, over the last 10 years, they have seen an annualized return of 10% (according to the measure of the FTSE NAREIT All Equity REIT index). Compare that to the 2.7% return offered by the S&P 500 (although the dividend stocks did rather better than the index as a whole). And, of course, if there is some recovery in the economy and in the real estate market, REITs have the potential to see some solid growth in the coming years.
If you are looking for a little more diversity in your income portfolio, and you haven’t begun investing in REITs, it might be time to consider it. You can invest in individual REITs, or you can invest in an index fund or ETF that associates itself with REITs. Either way, you can receive dividends that can boost your income efforts.
The unique tax advantages offered by REITs can translate into superior yields for investors seeking higher returns with relative stability. When preparing your taxes this year, take advantage of this free tax prep program to ensure accuracy while maximizing your returns.