What is a REIT?
REIT stands for Real Estate Investment Trust. As the name implies, they are companies that deal in real estate, but to be classified as a REIT the company has to give out around 90% of the profits to the shareholders as dividends. This is good for people looking to get more in dividends, but it also means that the companies don’t have a lot of money to continue to grow. But they still will, if it is run appropriately.
Two Different Kinds of REITs
One type of REIT (and the most popular) owns actual buildings and rents them out. Some rent to individuals, but most rent to companies. The REIT company might rent a building out to Walgreen, Dollar General, or even Walmart. They buy the building, collect the rent and then distribute the lion’s share of the profits to the shareholders. They are generally considered safe since they own hard assets.
The other type of REIT owns mortgages on buildings. This makes them more of a financial service than a building owner. These are considered to be a bit riskier, since sometimes people and companies’ default on their loans. But if the loans are working correctly, it can be more profitable and the dividends can be higher. Most people wouldn’t want to own these, but I have one, just to have the experience. It’s part of my diversification plan!
I have a couple of the REITs that own buildings, and one of them is a bit different too. It actually specializes in owning hotels, but it not only owns the hotels, but runs them as well. I expect that if the country ever starts to travel around again, they will do pretty well. I bought the stock just after the Covid crisis was over with and figured that travel would open up, but along comes the war, high gas prices, high inflation, and people are backing down on their vacation travel.
Another Nice Thing
Some of the REITs pay their dividends monthly. This is nice if you are using the dividends to augment your income. I tend to re-invest all my dividends so it doesn’t really matter to me, but it might in the future. One problem is that dividend amounts are often quoted for quarterly or yearly amounts. So you might see an amount of $1.20 per share but that’s the yearly amount and every month you get 10 cents per month. But usually the stock price is low enough that you can buy enough to make it worth your while.
Not a Whole Portfolio Full
You might think it would be good to have a bunch in your portfolio, but finding good ones is not easy. Some of the most stable cost a good amount of money, while volatile ones can be really pretty cheap. So like anything, it’s something good to include in a portfolio, but you don’t want to count on it as the main core position. Find one or two good ones and use them to round out the dividend portion of your portfolio.
ETFs are available
If you prefer to use ETFs, there are several that specialize in REITs. This brings safety in numbers, right? It might be a good way to go, to be included in the REIT world without the risk. But I guess that’s true for any ETF. The risk is reduced, but the payout is reduced too. I have not gone this route myself, so I don’t really know much more than that they are available.
