Last month we introduced some investment strategy changes that we are implementing. One of the changes is increasing your portfolio allocation to Real Estate Investment Trusts, or REITs. We have used REIT mutual funds for many, many years, so the only change we are making is increasing our allocation to REITs.
Here are some Fun Facts on REITs:
Real Estate Investment Trusts invest in real estate, either as owners in equity REITs or as lenders in mortgage REITs. The mutual funds we use are equity REITs since we want to be owners, not lenders.
Real Estate Investment Trusts are stocks that trade on the stock exchange just like stock in Coca-Cola or Microsoft. The companies that issue these stocks buy and manage large commercial real estate properties. If you live in the Cincinnati area, you may have seen the name Duke Realty as you entered an office building or shopping center. Duke Realty is an example of a REIT in which you can directly buy stock and own a share of the real estate properties that they own and manage.
There are several major REIT categories, including retail, residential, office, health care, industrial, and hotel and resort REITs. Residential REITs do not own individual homes but rather own very large apartment complexes.
REIT mutual funds are diversified so that the major REIT categories listed above are each less than 15% of the total fund, except for a broader category called specialized REITs, which may be about 30% of the fund. So don’t worry about being loaded up on shopping centers or office buildings or self-storage units, the latter being the category that clearly proves most people own too much stuff!
REITs offer a competitive dividend yield that can grow over time plus the potential for capital appreciation, just like stocks. We like both the income and growth potential. The income dividend from REITs does not qualify for the special 15% tax rate on common stock dividends, so we try to limit owning REIT funds to IRAs or tax-deferred accounts where the tax treatment is not a disadvantage.
REITs are volatile like stocks but are not closely correlated to U.S. stocks because they move up or down at different times and in different magnitudes than U.S. stocks; hence they provide portfolio diversification. In the long run, REIT investors have not sacrificed total return compared with U.S. stocks and have enjoyed current income and portfolio diversification.
Now you know the “Fun Facts …” about REITs!
Enjoy these early summer days!
As always, please contact us with any questions, news, or comments.