REITs are companies that operate real-estate properties and generate revenue through rent collection. As a REIT, a company needs to pay at least 90% of its taxable income to shareholders through dividends. Consequently, many investors have turned to REITs as an attractive source of yields.
For instance, VNQ has a 3.0% 12-month yield, IYR has a 3.58% 12-month yield and RWR has a 3.0% 12-month yield. The MSCI U.S. REIT Index was yielding 3.8% as of the end of May. In contrast, the S&P 500 shows a 2.33% dividend yield.
Investors have piled into REITs this year as an attractive income alternative in response to the falling yields in benchmark 10-year Treasury notes. Treasuries yields are hovering around 2.56% after falling from around 3.0% at the start of the year.
Investors should be aware that REITs are sensitive to changes in interest rates.
“The risk of rising interest rates is the biggest risk to the REIT sector,” according to Morningstar analyst Abby Woodham. “Because REITs must pay out most of their income as dividends, they rely on debt for growth. For REITs, higher rates mean more-expensive debt servicing and less business reinvestment. REIT yields also become less attractive relative to Treasuries when rates are high, putting downward pressure on the sector’s valuation.”
For more information on real estate investment trusts, visit our REITs category.
Max Chen contributed to this article.