Are REITs safer than stocks?
Key Points. REITs have outperformed stocks on 20-to-50-year horizons. Most REITs are less volatile than the S&P 500, with some only half as volatile as the market at large.
Compared to other investments such as stocks and bonds, REITs are subject to various risk factors that affect the investor's returns. Some of the main risk factors associated with REITs include leverage risk, liquidity risk, and market risk.
Any increase in the short-term interest rate eats into the profit—so if it doubled in our example above, there'd be no profit left. And if it goes up even higher, the REIT loses money. All of that makes mortgage REITs extremely volatile, and their dividends are also extremely unpredictable.
Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.
The economy can influence real estate or stock investment returns. "Stock prices are more volatile than real estate prices – and while stocks tend to perform well in the early stages of an inflationary updraft, under high inflation, real estate may perform better," says Earle.
REITs allow investors to pool their money and purchase real estate properties. By law, a REIT must pay at least 90% of its income to its shareholders, providing investors with a passive income option that can be helpful during recessions.
REIT Stock Performance and the Interest Rate Environment
Over longer periods, there has generally been a positive association between periods of rising rates and REIT returns. This is because rising rates generally reflect improvement in the underlying fundamentals.
But since REITs are invested in property, there's more protection against the horror show of having shares crash to $0. By law, 75% of a REITs asset must be invested in real estate. The market value of the property owned by the REIT offers a bit of protection, as long as the value of the property doesn't go to zero.
A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.
To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
Is it better to invest in REITs or stocks?
REITs have outperformed the S&P 500 over the past 20-, 25-, and 50-year periods. Stocks have delivered higher returns in recent years, with the S&P 500 beating REITs over the previous one-, five- and 10-year periods. However, the overall data shows that REITs have outperformed stocks over the long term.
March 5, 2024, at 3:47 p.m. REITs are public companies with large real estate portfolios, and are known to havesizable dividends. Real estate investments can be an excellent way to earn returns, generate cash flow, hedge against inflation and diversify an investment portfolio.
It depends on many factors, including the investor's individual preferences, risk tolerance, and timeline. If you're looking for something steady that requires little to no work on your end, REITs are a good option. But if you like more control and freedom, a direct investment may be a better option.
- People who are low on capital. Real estate is a capital-intensive investment. ...
- People who seek high returns on low expenses. ...
- People who are not ready for hard work. ...
- People who don't like to play the long game. ...
- People who want excitement.
- High-yield savings accounts.
- Certificates of deposit (CDs)
- Bonds.
- Funds.
- Stocks.
- Alternative investments and cryptocurrencies.
- Real estate.
Here are the best low risk real estate investment types: Long-Term Rental Properties. Short-Term Rental Properties. Buy-and-Hold Real Estate.
Still, in a general sense, they are income securities and do trade like income securities. You can usually count on high-yielding REITs moving up when rates are moving down.
REITs provide natural protection against inflation. Real estate rents and values tend to increase when prices do. This supports REIT dividend growth and provides a reliable stream of income even during inflationary periods.
The generous dividend payments enjoyed by REIT investors may look particularly attractive moving forward. With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts.
But from a REIT-wide perspective, one of the biggest problems has been rising interest rates. Rising interest rates impact REITs in a number of ways. Directly, interest expenses can go up as the interest rates on variable-coupon debt increase and as fixed-rate debt rolls over.
Why are REITs getting hammered?
Real estate investment trusts (REITs) have been hammered since 2022 with interest rate increases. At the last Federal Open Markets Committee (FOMC) meeting, the Federal Reserve promised another hike in 2023 and spooked the markets by stating that higher rates may have to continue for a longer time.
Usually REITs move a whole lot slower than they have over the past year. It's really rare for, say, the mortgage rate to double in a single year. REITs are very rate-sensitive instruments. They're designed to pay out steady income, and income-focused investments generally are very sensitive to changes in yields.
Risk Considerations
Investing involves risk, including possible loss of principal. Past performance does not guarantee future return. All financial investments involve an element of risk. Therefore, the value of the investment and the income from it will vary and the initial investment amount cannot be guaranteed.
Publicly traded REITs are traded on national security exchanges every day, so there is usually some liquidity when selling them. However, the goal should be selling at a profit and not a loss. Getting out of a non-traded REIT can be difficult and expensive.
Dividends are particularly valuable in retirement because they provide a consistent stream of income that can help cover living expenses. And, unlike bonds, dividend stocks offer the potential for capital gains as well as income. That means your portfolio can continue to grow even as you withdraw money from it.
