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

FAQs

Does REIT pay dividends? ›

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.

They can provide added diversification, potentially higher total returns, and/or lower overall risk. In short, their ability to generate dividend income along with capital appreciation makes them an excellent counterbalance to stocks, bonds, and cash.

Since REITs return at least 90% of their taxable income to shareholders, they usually offer a higher yield relative to the rest of the market. REITs pay their shareholders through dividends, which are cash payments from corporations to their investors.

It is beneficial for a company to become a REIT as it results in no income tax obligations on the corporate level. Instead, these taxes are passed on to the individual investors. In return, these companies distribute at least 90% of earnings to shareholders in the form of dividends, resulting in very high yields.

REITs don't have to pay a corporate tax, but the downside is that REIT dividends are typically taxed at a higher rate than other investments. Oftentimes, dividends are taxed at the same rate as long-term capital gains, which for many people, is generally lower than the rate at which their regular income is taxed.

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.

Structurally, REITs have a firm footing. Even though India's real estate is often dogged by cash crunch and project delays, REITs overcome these issues by having to put at least 80 per cent of investors' money into completed and income-generating commercial projects.

REITs must prioritize short-term income for investors

“They pay out stable dividends, provided the properties are doing well,“ says Stivers, the financial advisor from Florida. In exchange for more ongoing income, REITs have less to invest for future returns than a growth mutual fund or stock.

What happens to REITs when interest rates go down? ›

With rate cuts on the horizon, dividend yields for REITs may look more favorable than yields on fixed-income securities and money market accounts. However, REIT stocks are only as good as the properties they own — and some real estate sectors may be better positioned than others.

For investors seeking a steady stream of monthly income, real estate investment trusts (REITs) that pay dividends on a monthly basis emerge as a compelling financial strategy. In this article, we unravel two REITs that pay monthly dividends and have yields up to 8%.

Real estate investment trusts reduce the barrier to entry for investors in the real estate market and provide liquidity, regular income and other perks. However, you'll be exposed to risks that aren't inherent in the stock market and dividends are subject to ordinary income tax.

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.

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.

While some stocks distribute dividends on a quarterly or annual basis, certain REITs pay quarterly or monthly. That can be an advantage for investors, whether the money is used for enhancing income or for reinvestment, especially since more frequent payments compound faster.

“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% of its taxable income to shareholders annually in the form of dividends.”

Real Estate Investment Trusts, or REITs, are known for their dividends. The average dividend yield for equity REITs is right around 4.3%.