One of the ways that you can diversify your dividend portfolio, while also providing you with reasonable returns and dividends, is to investing in real estate investment trusts (REITs). A REIT can provide you with the addition of real estate to your investment portfolio without requiring you to come up with a large amount of capital. Plus, REITs pay out dividends.
Brief Overview of REITs
Real estate investment trusts are basically collections of real estate investments. They can be public or private in nature, and the publicly held REITs are traded on stock exchanges much like stocks. This makes them easy to purchase. REITs can include commercial or residential real estate investments, as well as investments in real estate related assets such as storage companies and mortgage providers.
REITs are desirable because of their tax structure; corporations formed them originally with the intent to create a tax benefit. Because of the tax treatment REITs enjoy, they are required to pay 90% of their taxable income out to investors. This means that, in some cases, the dividend yield can be quite generous.
Investing in REITs
Whenever you choose dividend investments, you need to be careful about your efforts, and do your research. This is especially important as you consider REITs. The climate following the relatively recent mortgage market meltdown and the financial crisis of 2008 means that many REITs have been hit pretty hard. They have lost value, and some of them have cut their dividend payouts.
This state of affairs means that there are some great deals to be had, allowing you to find REITs at very reasonable prices. However, you do need to be careful. As you would with any dividend stock, investigate the merits of the REITs you are considering before you decide to invest:
- Consistent dividend performance: Look at the dividend performance of the company. Look at the pattern of dividend payouts and increases. Consider that solid companies have regular performance, and regular increases. During times of trouble, the prudent REIT doesn’t need to cut dividends as much. Look back: There are some REITs that have been less affected by global real estate market setbacks than others. While future performance can’t be guaranteed by the past, the past can, nevertheless, provide some insight.
- Reasonable expectation for growth: Look at the holdings of the REITs in question. Is there reasonable expectation for growth? Consider whether or not the REITs you are researching offer the potential for earnings growth as the current economic situation improves. A REIT heavily invested in subprime mortgages might not be your best option, but a REIT that has a reasonable expectation of earnings because of more prudent assets might not be a bad choice.
Now might be a good time to consider REITs. With the US economy, and the global economy, showing some symptoms of recovery, it is possible that real estate could also see some amendment. If this is the case, the REITs in your dividend portfolio could allow you to see regular income – and an increase in that income – as the situation improves.