Real estate investment trusts, or REITs, are known for their above-average and stable dividend yields. With savings accounts paying record-low interest rates, could sticking emergency savings or other money you might need into REITs be wise?
In this Oct. 22 Fool Live clip, three of our REIT experts -- Matt Frankel, CFP, Kevin Vandenboss, and Matt DiLallo -- discuss whether this could be a smart way to extract more income from your savings.
Matt Frankel: But Mike says, "If someone had $30,000, for example, they would need a year from now. Investing in a REIT or another dividend stock paying nine percent dividend seems like a no-brainer, or earning nine percent over the next year is a great return. What am I missing? Or is that too short of a timeframe to invest in the stock like that?" Guys?
Matt DiLallo: I am a big diversification fan. So if you want to take that 30,000 and put it across a bunch of REITs, thats a different story. Then also, they've done a lot of studies and they've said REITs should probably be 5-15 percent of your portfolio. That's the sweet spot because of the volatility and cyclicality of the real estate industry. This year has been a perfect example. I think the REITs are down 17 percent overall. So now, over the next year, you could bank that dividend plus the upside. It's a really high-risk high reward potential trade. But I think spreading it out over multiple REITs would be a better idea.
Matt Frankel: Yeah. I would say though to answer the question to what are you missing? It's that the stock price could change over the next year.
Matt DiLallo: Yeah.
Matt Frankel: If you get a nine percent dividend and the stock goes down by 10 percent, you would've been better off in a savings account.
Kevin Vandenboss: Yeah.
Matt Frankel: But over time, we don't think the stock is going to go down 10 percent a year. But in one year, I mean, I think everyone would agree that any given REIT over the next year could conceivably go down by 10 percent or more depending on what happens. So it's not just an income play. A REIT is not a savings account that pays nine percent. It's down in value. I generally say that if you don't have at least a five-year timeframe, don't invest in REITs. But then again, I have more than 15 percent of my portfolio in REITs like Matt just said.
Kevin Vandenboss: I definitely agree. Five years minimum of that because you can lose your money pretty quick.