A Real Estate Investment Trusts (REIT) is a special type of fund consisting of a pool of real estate assets (commercial properties, mortgages, etc.). REITs are bought and sold on the Stock Exchange, along with equities; and, as with equities, the purchase of an REIT can yield significant rewards.

Types of REITs

There are different types of REITs: “Equity”, “Mortgage”, and “Hybrid”. Equity REITs consist of investments solely in properties; the value of this kind of REIT depends on the rent accumulated by all of the properties. Mortgage REITs invest in property mortgages and derive their value from the interest collected on the mortgages. Hybrid REITs combine property investment and mortgage investment. Investing in any one these kinds of REITs allows an investor to affordably participate in real estate development.

REITs are also profitable investments because of their tax and dividend advantages. So long as an REIT pays out 90% of its income to its shareholders, it cannot be taxed on the corporate level. Consequently, most High Yield Dividend REITs pass cash flow directly to the investors in the form of dividends, accounting for their high dividend yields. The average dividend yield of REITs is about 5%, but many REITs offer much higher yields.

Taxes

Despite not being taxed on a corporate level, the cash flow distributed to the shareholders through dividends is considered taxable income and must be reported to the IRS. The 10% dividend yields of some REITs, however, more than compensate for income tax expenses. An REIT is designed to be held in an account for enough time for the investor to reap the benefits of the consistent, hefty dividend. Another important feature offered by many REITs is the Dividend Reinvestment Plan; the DRIP allows the shareholder to reinvest the dividend payouts back into the REIT with minimal costs.

REIT Payout Ratio

A useful measurement of the dividend payout of High Yield Dividend REITs is the Dividend Payout Ratio, defined as the annual dividend per share divided by its earnings per share (EPS). As 90% of all earnings of most any REIT are paid out to the shareholders, the payout ratios are almost always high. Some REITs post sporadic payout ratios of over 100%, but such high ratios are impossible to sustain. It is financially advisable to seek out REITs with payout ratios below 100% that offer consistent, healthy dividend yields.

A profitable REIT with a hefty dividend yield is both a rewarding and reliable investment.