Do REITs Pay Dividends? Yes, and There’s a Good Reason Why (2024)

FAQs

Do REITs Pay Dividends? Yes, and There’s a Good Reason Why? ›

REITs, also known as real estate investment trusts, do make dividend payments to investors. In fact, due to its nature, a REIT must pay at least 90% of taxable income to qualifying holders.

Advantages and Disadvantages of REITs

REITs are easy to buy and sell, as most trade on public exchanges. REITs offer attractive risk-adjusted returns and stable cash flow. Including real estate in a portfolio provides diversification and dividend-based income.

To qualify as securities, REITs must payout at least 90% of their net earnings to shareholders as dividends. For that, REITs receive special tax treatment; unlike a typical corporation, they pay no corporate taxes on the earnings they payout.

Are REITs Good Investments? Investing in REITs is a great way to diversify your portfolio outside of traditional stocks and bonds and can be attractive for their strong dividends and long-term capital appreciation.

Because REIT dividends are considered small business income, investors can potentially deduct up to 20% of their QBI on their taxes. As of 2023, the total taxable income limit to qualify for this deduction is $182,100 for filing individually and $364,200 for filing jointly.

In general, REITs are not considered especially risky, especially when they have diversified holdings and are held as part of a diversified portfolio. REITs are, however, sensitive to interest rates and may not be as tax-friendly as other investments.

Benefits of investing in REITs include tax advantages, tangibility of assets, and relative liquidity compared to owning physical properties. Risks of investing in REITs include higher dividend taxes, sensitivity to interest rates, and exposure to specific property trends.

Reinvesting REIT dividends can help retirement savers grow their portfolio's investment, and historically steady REIT dividend income can help retirees meet their living expenses. REIT dividends historically have provided: Wealth Accumulation. Reliable Income Returns.

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.

What I wish I knew before buying REITs? ›

REITs must prioritize short-term income for investors

In exchange for more ongoing income, REITs have less to invest for future returns than a growth mutual fund or stock. “REITs are better for short-term cash flow and income versus long-term upside,” says Stivers.

Risks of investing in a REIT include market volatility, interest rate risk, dividend dependence, regulatory risks, management risks, limited control over the trust's properties and management, and lack of transparency.

REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.

If you own REITs in an IRA, you won't have to worry about dividend taxes each year, nor will you have to pay taxes in the year in which you sell a REIT at a profit. In a traditional IRA, you won't owe any taxes until you withdraw money from the account.

Finally, a REIT is not a pass-through entity. This means that, unlike a partnership, a REIT cannot pass any tax losses through to its investors.

Avoiding Double Taxation

That means REITs avoid the dreaded “double-taxation” of corporate tax and personal income tax. Instead, REITs are sheltered from corporate taxes so their investors are only taxed once.

Steady dividend income and capital appreciation: Investing in REITs is said to provide substantial dividend income and also allows steady capital appreciation over the long term.

REITs historically have delivered competitive total returns, based on high, steady dividend income and long-term capital appreciation. Their comparatively low correlation with other assets also makes them an excellent portfolio diversifier that can help reduce overall portfolio risk and increase returns.