Real Estate Investment Trusts (REITs) are entities that own and operate income producing real estate assets. Most REITs invest in commercial properties in major metropolitan centers. Some even finance real estate development projects. By law they are required to distribute at least 90% of their taxable income to shareholders in the form of dividends. REIT stocks are also known as real estate stocks.


Types of REITs:

• Equity REITs own and operate income producing real estate assets.
• Mortgage REITs lend money to real estate developers either directly or indirectly by investing in mortgage backed securities or by acquiring loans.
• Hybrid REITs have the characteristics of both an Equity REIT and a Mortgage REIT. They own and operate income producing real estate assets as well as lend money for real estate development.

Benefits of investing in REITs:

• They typically provide high dividends as well as a moderate capital appreciation. Overall returns are better than bonds and less than high growth stocks.
• Diversification in a portfolio of stocks helps in reducing overall risks. Loss in a stock can be set off by a gain in another stock in the same portfolio. REITs, with their consistent performance of high dividends and reasonable capital appreciation help in achieving diversification.
• Consistent dividend payments as they are, by law, required to distribute 90% of their taxable income to shareholders as dividends.

A study conducted by Ibbotson Associates on REITs lead to the following conclusions:

• REITs offer an attractive risk/reward trade-off
• The correlation of REIT returns with other investments has declined over the last 30 years
• REITs may boost return and/or reduce risk when added to a diversified portfolio.

Recognizing the importance and success of REITs, since 2001 the S & P 500 index added REIT stocks too.

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