Investing in REITs

Reasons for REIT Investment

REITs are total return investments. They typically provide high dividends plus the potential for moderate, long-term capital appreciation. Long-term total returns of REIT stocks are likely to be somewhat less than the returns of higher risk, high-growth stocks and somewhat more than the returns of lower risk bonds. REITs are required by law to distribute each year to their shareholders at least 90 percent of their taxable income. Thus, REITs tend to be among those companies paying the highest dividends. The dividends come primarily from the relatively stable and predictable stream of contractual rents paid by the tenants who occupy the REIT's properties

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How to Invest in a REIT

An individual may invest in a publicly traded REIT, which is listed on a major stock exchange, by purchasing shares through a securities dealer. As with other publicly traded securities, investors may purchase common stock, preferred stock or debt securities. An investor can enlist the services of a broker, investment advisor or financial planner to help analyze his or her financial objectives. These professionals may be able to recommend appropriate REIT investments for the investor. 

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List of REIT Funds

The real estate investment marketplace is changing around the world because of the widespread adoption of the REIT in 30 countries. In addition to numerous active and passively managed domestic funds (both open and closed-end), new global funds are increasingly popping up, offering an expanded range of investment opportunities.

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Taxes and REIT Investment

For REITs, dividend distributions for tax purposes are allocated to ordinary income, capital gains and return of capital, each of which may be taxed at a different rate. All public companies, including REITs, are required early in the year to provide their shareholders with information clarifying how the prior year's dividends should be allocated for tax purposes. This information is distributed by each company to its list of shareholders on IRS Form 1099-DIV.

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REITs and Interest Rates

History shows that share prices of listed equity REITs have more often increased than decreased during periods of rising interest rates. There have been 16 periods since 1995 when interest rates rose significantly—and listed equity REIT returns were positive in 12 of those episodes. That does not mean, of course, that one should ignore the other four periods when share prices declined. However, the more common pattern of REIT resilience during periods of rising interest rates reflects earnings growth, as an economy that generates stronger earnings is often also accompanied by higher interest rates.

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