Equity REITs: Is There Room for Real Estate in Your Portfolio?

This week, Craig Siminski, of CMS Retirement Income Planning, shares with us an article discussing some unique characteristics of REITs, including how they can offer a consistent income stream and why changing interest rates can affect REIT performance:

An equity real estate investment trust (REIT) uses the combined capital of many shareholders to buy and operate residential, commercial, and industrial income properties. Equity REITs of all stripes are listed on the major indexes and traded like stocks, so investors may receive a stable income derived mostly from real estate rents without having to finance and manage properties on their own.

However, REIT share prices can be volatile and are sensitive to changes in interest rates.

You can buy shares in individual REITs, just as you might buy shares in any publicly traded company, or you can invest through mutual funds or exchange-traded funds. The option to invest in a REIT fund may also be available in your tax-deferred workplace retirement plan.

In 2023, it’s estimated that 50% of American households were invested in REITs through one or more of these channels.

Income and Diversification

A REIT must pay out at least 90% of its taxable income each year as shareholder dividends. And unlike many companies, REITs generally do not retain earnings, which is why they may provide higher yields than many other types of equity investments. In 2023, equity REITs yielded 3.9%, on average, compared with 1.4% for stocks in the broader S&P 500 Index.

The real estate industry’s business model and distinct property markets offer a risk-return profile that differs from the other stock market sectors. In some respects, REITs are a unique asset class, and because their share prices do not always follow the movements of stocks or bonds, they can be a helpful tool to broaden asset allocation and increase diversification. Over the 10-year period ending in 2023, equity REITs had a 76% correlation with the S&P 500 and 56% correlation with the…

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Craig Siminski is a CERTIFIED FINANCIAL PLANNER™ professional, with more than 25 years of experience. His goal is to provide families, business owners, and their employees with assistance in building their financial freedom.

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