Real Estate Investment Trusts (REITs) present many benefits for investors. REITs provide opportunities for strong dividends, portfolio diversification, protection from inflation and robust performance.
Commercial real estate sector
Data provided by the 2012 Research Magazine Guide to REIT Investing indicated that while economic growth in the United States slowed during the first six months of the year, one sector that managed to show encouraging signs was commercial real estate.
Many subsectors of commercial real estate fared well during the first six months of 2012, including apartments, warehouse, retail and office space. While vacancy improved gradually, the rents paid by these properties grew.
While the S&P 500 Index surged 9.49 percent during the first half of the year, the FTSE NAREIT All Equity REITs Index, which represents 128 firms in the industry worth more than $500 billion, spiked 14.91 percent.
During a time of high asset correlations, securities that provide diversification can certainly prove valuable. Between the years of 1991 and 2011, REITs had a 56 percent correlation with large-cap stocks. This compares to an 80 percent correlation between small-cap equities and large-caps during the period. During periods of substantial volatility, REITs can be helpful as they do not move closely with other equities.
Equity REITs provide a strong stream of dividend income, due to their corporate structure and their continued collection of rents. These trusts generate the income by gathering rental income from tenants, and the fact that they are incorporated as pass-through entities means that they need to distribute at least 90 percent of taxable income to shareholders every year.
This requirement means that a larger share of their returns is attributed to dividends. The dividend payments made by REITs have generally been substantially higher than those paid by companies contained in the S&P 500 Index.
Protecting against inflation
Investors can utilize REITs to protect themselves from the costs of inflation. These trusts enjoy rents and property values that generally rise along with the price level, which helps the dividends paid by the trusts to increase over time. These gains help to provide investors with income even during periods of high inflation.