REITs and stocks are a topic of debate as investors ponder which investment is better. Here you will learn the similarities and differences among REITS (real estate investment trusts) and stocks, and which investment offers better returns.
The most common type of REITs are equity REITs, which are publicly traded on major stock exchanges. Equity REITs and stocks can both be easily bought and sold on exchanges such as the NYSE or NASDAQ.
Since REITs and stocks both trade on major exchanges, both are subject to market risk and fluctuations in price due to economic conditions.
And since REITs and stocks can be traded on public exchanges, both are very liquid investments.
It is simple for investors to free up money from stocks or equity REITs. Both investments can be bought and sold at any time with ease.
Both publicly traded REITs and stocks are registered and regulated by the SEC.
This means that the companies are required to file audited financial statements that can be accessed by the public. This is an advantage for potential investors because they can research the company’s financial performance before making an investment.
Even though REITs are bought and sold like stocks, real estate is a different asset class than equities.
REITs and stocks do not have a strong correlation, and REIT performance is generally expected to deviate from the performance of major stock indices.
Between Ys 1994 and 2018, the correlation between REITs and stocks was 0.45. This is why REITs are great for providing diversification within investment portfolios that mainly hold stocks.
REITs are required to pay 90% of taxable income to shareholders in the form of dividends. Therefore, many REITs have above-average dividend yields. It is common for REITs to have safe dividends that are considerably higher than the average dividend yield associated with stocks.
REITs may appear volatile and risky from a short-term perspective, but the long-term returns of REITs are impressive. When looking at 5 to 10-yr time frames, it is common to see that stocks outperform REITs, even if it is by a relatively small margin. However, when taking 20 or more yrs into account, REITs routinely provide better returns than stocks. The longer REIT investments are held, the more likely it is that they will provide better returns relative to stocks.
The reality is that an investor who is looking to create a diversified portfolio should invest in both REITs and stocks.
REITs and stocks are both unique investments that offer distinct benefits, and an investor will see the most success when a smart balance between various investments is determined.
Have a prosperous day, Keep the Faith!