It would be a good idea to have a small portion of real estate investment trusts (REITs) in your portfolio at all times because of the diversification they offer. However, they are particularly attractive during periods of low interest rates and a down stock market. Typically when stocks are faltering, real estate can buoy the portfolio. And when bond interest rates are low, REITs can provide a much better stream of income.
Who should buy real estate investment trusts?
REITs are geared to both large and small investors interested in current income and a stake in the real estate market as part of a diversified portfolio.
Who should not buy real estate investment trusts?
REITs would not be attractive to investors looking for capital appreciation. REITs distribute 90 to 100 percent of pretax earnings each year to shareholders in the form of dividends, but the value of the shares tends to change very little from year to year.
REITs also may not be appropriate for you if you don't need the income and you want to minimize your taxes. The dividends paid by REITs are added to your total taxable income, so you will owe more taxes - unless you use REITs in your IRA or other tax-deferred retirement plan.
Return of real estate investment trusts
The rate of return offered by REITs is outstanding as compared with other income-producing investments. In recent years, while money market funds were paying 1 to 2 percent and many government bonds were paying less than 5 percent, many real estate investment trusts were paying dividends of 6 to 12 percent. And the dividends for many REITs increase nearly every year, providing yet another advantage over bonds and other traditional fixed-income investments.
Risk of real estate investment trusts
Although most REITs provide pretty steady performance, there are risks with REITs. The value of your REIT shares and the dividend they pay depends on the strength of the real estate market. In a depressed real estate market, you could see the value of your shares decline. In a bad commercial real estate market, rising vacancy rates would also cut into income collected by the REIT, which would reduce the amount of your dividend.
