Exchange traded fund investors have piled into dividend-generating investments after a year of high market volatility and low fixed-income yields, but there are other options available. For instance, real estate investment trusts, or REITs, also offer decent income streams.
REITs are securities that trade like stocks on major exchanges. The investments hold physical properties that generate revenue from rent payments, or REITs may be mortgage based, which means they hold property mortgages through either loaning money for mortgages or purchasing existing mortgages and other mortgage securities. Hybrid REITs hold both mortgages and physical properties.
The companies generate revenue from rent collected on properties. REITs then pay out a chunk of their net income to shareholders through dividends in order to qualify for federal tax breaks.
“REITs afford retail investors the ability to participate in a traditionally illiquid asset class–real estate–and receive stocklike returns with bondlike income streams,” according to Morningstar analyst Abraham Bailin. “These benefits come in addition to real estate’s ability to serve as an inflationary hedge through its asset appreciation and rising rents.”
Since the financial crisis, new issues of commercial mortgage REITs have become less risky, some industry experts argued.