Are REITs A Safe Investment For Retirement?

Real estate is one of the few asset groups that is well-suited to retirement portfolios. A portfolio of real estate investment trusts (REITs) can provide a continuous stream of retirement income for a lifetime if managed properly.

To begin, the tax code encourages REITs to pay large dividends. REITs are exempt from federal corporate taxes if they distribute at least 90% of their taxable revenue as dividends to their shareholders. The corporation tax rate in the United States is a whopping 35%, so we’re talking about a substantial sum of money.

A good retirement income portfolio, on the other hand, demands more than a high dividend yield. You’ll also need a lot of stability. You can’t afford a dividend decrease or a severe business setback if you plan to live on cash from your investments. As a result, the best REITs for retirement are moderate yielders in non-cyclical subsectors. Experience is also important here; you should trust REITs that have made it through at least one recession with their payouts intact.

We’ll take a look at 15 of the greatest REITs for generating long-term retirement income today. Certain categories, such as malls and office buildings, are missing; these are too sensitive to economic swings, and their major players dropped dividends during the 2007-09 recession and its aftermath. Instead, you’ll find 15 dependable firms that should keep paying their dividends on time, no matter what happens to the economy.

The information is current as of November 21, 2017. Dividend yields are computed by dividing the most recent quarterly dividend by the share price and annualizing the result. For current share prices and more, click on the ticker-symbol links in each slide.

What is the safest investment for retirement?

Although no investment is completely risk-free, there are five that are considered the safest to own (bank savings accounts, CDs, Treasury securities, money market accounts, and fixed annuities). FDIC-insured bank savings accounts and CDs are common. Treasury securities are notes backed by the government.

Fixed annuities often have guarantees written into their contracts, and money market accounts are considered very low risk. Annuities are similar to insurance contracts in that they include some safeguards in the event that the insurance company fails.

The main goal of these vehicles is to keep your principal safe. The provision of interest revenue is a secondary goal. You won’t earn huge returns from these options, but you also won’t lose money.

Are REITs safe long-term?

REITs are investments that provide a total return. They usually provide significant dividends and have a moderate chance of long-term financial appreciation. REIT stocks have long-term total returns that are comparable to value equities and higher than lower-risk bonds.

How much REIT should I have in my retirement portfolio?

In general, REITs should not account for more than 25% of a well-diversified dividend stock portfolio, depending on your specific objectives (such as the portfolio yield and long-term dividend growth rate you seek, as well as your tolerance for risk).

What should a 65 year old invest in?

Though stocks are sometimes considered of as a riskier investment that is better suited to younger investors, retirees can still benefit from using the market as part of their investment strategy. However, as you become older, you’ll want to be more conservative. According to one rule, the ratio of equities in your portfolio should equal 100 minus your age. Around 35% of your money should be in the stock market by the time you’re 65, though this will vary based on your unique circumstances and risk tolerance.

It’s also critical to choose the correct stocks. Like younger investors, it’s probably not a good idea to pursue huge gains from hot tech stocks. Instead, retirees should search for equities with a modest and steady growth rate, as well as dividends, which will put money in their pockets on a regular basis.

Mutual funds that specialize on dividend stocks may also be a suitable option. Your investment selections will be made by folks who know what they’re doing because mutual funds are managed by top financial professionals. Mutual funds also help you to diversify your risk by investing in a variety of equities, spreading out your risk and protecting you if one of the companies does not perform as well as predicted.

Why are REITs a bad investment?

Real estate investment trusts (REITs) are not for everyone. This is the section for you if you’re wondering why REITs are a bad investment for you.

The major disadvantage of REITs is that they don’t provide much in the way of capital appreciation. This is because REITs must return 90 percent of their taxable income to investors, limiting their capacity to reinvest in properties to increase their value or acquire new holdings.

Another disadvantage is that REITs have very expensive management and transaction costs due to their structure.

REITs have also become increasingly connected with the larger stock market over time. As a result, one of the previous advantages has faded in value as your portfolio becomes more vulnerable to market fluctuations.

Weak Growth

REITs that are publicly listed are required to pay out 90% of their profits in dividends to shareholders right away. This leaves little money to expand the portfolio by purchasing additional properties, which is what drives appreciation.

Private REITs are a good option if you enjoy the idea of REITs but want to get more than just dividends.

No Control Over Returns or Performance

Investors in direct real estate have a lot of control over their profits. They can identify properties with high cash flow, actively promote vacant rentals to renters, properly screen all applications, and use other property management best practices.

Investors in REITs, on the other hand, can only sell their shares if they are unhappy with the company’s performance. Some private REITs won’t even be able to do that, at least for the first several years.

Yield Taxed as Regular Income

Dividends are taxed at the (higher) regular income tax rate, despite the fact that profits on investments held longer than a year are taxed at the lower capital gains tax rate.

And because REITs provide a large portion of their returns in the form of dividends, investors may face a greater tax bill than they would with more appreciation-oriented assets.

Potential for High Risk and Fees

Just because an investment is regulated by the SEC does not mean it is low-risk. Before investing, do your homework and think about all aspects of the real estate market, including property valuations, interest rates, debt, geography, and changing tax regulations.

Fees should also be factored into the due diligence process. High management and transaction fees are charged by some REITs, resulting in smaller returns to shareholders. Those fees are frequently buried in the fine print of investment offerings, so be prepared to dig through the fine print to find out what they pay themselves for property management, acquisition fees, and so on.

What is the safest REIT?

These three REITs are unlikely to appeal to investors with a value inclination. When things are uncertain, though, it is generally wise to stick with the biggest and most powerful names. Within the REIT industry, Realty Income, AvalonBay, and Prologis all fall more generally into that category, as well as within their specific property specialties.

These REITs are likely to have the capital access they need to outperform at the company level in both good and bad times. This capacity should help them expand their leadership positions and back consistent profits over time. That’s the kind of investment that will allow you to sleep comfortably at night, which is probably a cost worth paying for conservative sorts.

Are REITs a good buy now?

  • No corporation tax: A company must meet certain criteria in order to be classed as a REIT. It must, for example, invest at least three-quarters of its assets in real estate and pay shareholders at least 90% of its taxable income. If a REIT fits these criteria, it receives a significant tax benefit because it pays no corporate tax, regardless of how profitable it is. Profits from most dividend stocks are effectively taxed twice: once at the corporate level and then again at the individual level when dividends are paid.
  • High dividend yields: REITs offer above-average dividend yields because they must pay at least 90% of taxable revenue to shareholders. It could, for example, offer a secure dividend yield of 5% or more, but the typical S&P 500 company yields less than 2%. If you need income or wish to reinvest your dividends and compound your gains over time, a REIT can be a good solution.
  • Total return potential: As the value of its underlying assets rises, a REIT’s total return potential rises as well. Real estate values rise over time, and a REIT can grow its worth by employing a variety of tactics. It might either build properties from the ground up or sell valued assets and reinvest the proceeds. A REIT can be a good total return investment when this is combined with substantial dividends.
  • REITs were designed to provide average investors with access to commercial real estate assets that would otherwise be out of reach. Most people can’t afford to buy an office tower outright, but there are REITs that can.
  • Diversification of your financial portfolio: Most experts think that diversifying your investment portfolio is a smart idea. Despite the fact that REITs are technically stocks, real estate is a distinct asset class from stocks. During difficult economic times, REITs tend to keep their value better than equities, and they’re a terrific way to add stable, predictable income. These are only two examples of how an all-stock portfolio’s inherent risk can be mitigated.
  • Real estate transactions might take a long time to buy and sell, but REITs are a very liquid investment. A REIT can be bought or sold at any time. Because traded REITs can be purchased and sold like stocks, it’s simple to receive money when you need it.
  • Direct ownership and management of a property is a business that demands time and effort. REIT shareholders do not own the properties or mortgages in its portfolio, thus they do not have to deal with property maintenance or development, landlord services, or rent collection as a property owner or management would.

Are REITs taxed differently?

Dividend payments are assigned to ordinary income, capital gains, and return of capital for tax reasons for REITs, each of which may be taxed at a different rate. Early in the year, all public firms, including REITs, must furnish shareholders with information indicating how the prior year’s dividends should be allocated for tax purposes. The Industry Data section contains a historical record of the allocation of REIT distributions between regular income, return of capital, and capital gains.

The majority of REIT dividends are taxed as ordinary income up to a maximum rate of 37% (returning to 39.6% in 2026), plus a 3.8 percent surtax on investment income. Through December 31, 2025, taxpayers can deduct 20% of their combined qualifying business income, which includes Qualified REIT Dividends. When the 20% deduction is taken into account, the highest effective tax rate on Qualified REIT Dividends is normally 29.6%.

REIT dividends, on the other hand, will be taxed at a lower rate in the following situations:

  • When a REIT makes a capital gains distribution (tax rate of up to 20% plus a 3.8 percent surtax) or a return of capital dividend (tax rate of up to 20% plus a 3.8 percent surtax);
  • When a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from a taxable REIT subsidiary or other corporation (20% maximum tax rate plus 3.8 percent surtax); and when a REIT distributes dividends received from
  • When allowed, a REIT pays corporation taxes and keeps the profits (20 percent maximum tax rate, plus the 3.8 percent surtax).

Furthermore, the maximum capital gains rate of 20% (plus the 3.8 percent surtax) applies to the sale of REIT stock in general.

The withholding tax rate on REIT ordinary dividends paid to non-US investors is depicted in this graph.

Should I have REITs in my 401k?

REITs are a great option for investing in a retirement account. The existing tax-advantaged nature of REITs can be amplified by the tax-advantaged structure of retirement funds, resulting in some tremendous long-term return potential.