Some of the most overlooked investment vehicles for income are real estate investment trusts (REITs).
They are an easy way for investors to gain access to professionally managed, large-scale and income-producing companies.
Most REITs own commercial real estate. So for investors who don’t want to buy and manage property directly, REITs are a great, hassle-free way to diversify their portfolios.
And that’s not even their biggest draw. A REIT’s largest attraction is its ability to produce a reliable stream of income through dividends.
Why Own REITs?
Many people shy away from REITs for a number of reasons. But let’s clear the air.
For a real estate trust to qualify as a REIT, it must distribute 90% or more of its taxable income back to its shareholders. And because they distribute such a large amount of their taxable income, most REITs don’t pay any corporate income taxes.
When you purchase a REIT, you purchase a unit, which is akin to a share. Unit holders receive dividends that are made up of ordinary income, capital gains or return of capital.
There are three kinds of REITs: equity, mortgage and hybrid.
Equity REITs invest in real estate only. They generate income from rent, capital gains from the sale of property and dividends. This is the most popular type since it gets income from three different sources.
Mortgage REITs invest solely in mortgages and mortgage-backed securities. They are less popular than equity REITs because they are sensitive to any change in interest rates.
The least common, hybrid REITs, invest in both mortgages and real estate.
Some investors think REITs are difficult to deal with when tax season rolls around. But that’s simply not the case.
Other income-producing vehicles like master limited partnerships and limited liability corporations force unit holders to file extremely complicated K-1 forms every year. If you’ve ever filled them out yourself, you know what I’m talking about.
But there are no complicated K-1 forms to fill out for REITs when tax season rolls around. All tax information needed is on a much simpler 1099-DIV form, sent out by REITs to unit holders every year.
The bottom line is that REITs provide a steady stream of income. And their yields are much higher than those in fixed income markets.
One of the highest-yielding REITs is Global Net Lease (NYSE: GNL). It has a globally diversified portfolio of commercial properties.
Its assets include office, industrial, retail and distribution properties. Office buildings make up more than half of Global Net Lease’s portfolio.
It currently sports a forward dividend yield of around 9.4% and trades for around $17.
If your focus is on industrial properties, consider shares of Gladstone Commercial Corporation (Nasdaq: GOOD). Its portfolio has industrial, commercial and medical properties in the U.S.
Its forward dividend yield is around 8.1%. Its shares are currently around $18.50.
Iron Mountain (NYSE: IRM) is another one of my favorites. It’s been around since 1951.
It’s the global leader in information management and storage services. It’s trusted by more than 225,000 customers worldwide.
Its 90 million-plus square feet of storage are contained in more than 1,480 locations in 50 countries. It currently has a forward dividend yield of around 9.5%, and its shares trade in the neighborhood of $26.
In the U.S., there are more than 225 REITs that trade on the major exchanges. Together, they have a market capitalization of more than $1 trillion.
Many investors approaching retirement should start to transition their portfolios to income-oriented holdings like REITs. Some of the best and highest yields can be found there.