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Here's Why New Investors Should Consider Investing in REITs

By Matthew Frankel, CFP® - Apr 30, 2021 at 7:03AM

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This type of stock is overlooked far too often by newer investors.

Many new investors focus on the headline-grabbing growth stocks, and unfortunately ignore some of the best long-term investment opportunities. One example is real estate investment trusts, or REITs, which can be a great way to build wealth and generate income. In this Fool Live video clip, recorded on April 20, contributor Matt Frankel, CFP, and Abby McCarthy, the senior VP of investment affairs for the National Association of REITs (Nareit), discuss why REITs aren't the "boring" stocks many newer investors assume they are. 

Matt Frankel: So, a lot of our investors are new. We've added a ton of members over the past year, which thank you to those who are listening. For those who are new and may not be that familiar with the REIT concept, what would you say to new investors, why they should think about adding REITs into their portfolio instead of maybe just focusing on the headline-grabbing growth stocks we've seen over the past year.

Abby McCarthy: Sure. Nareit actually has been studying the investment merits and benefits of REITs, obviously, since our existence in 1960. Through multiple research studies and multiple research partners, we consistently find that REITs really provide great diversification benefits to portfolios. They have very strong, long-term performance with reliable income components through their dividend yields and capital gains. In addition, they have low correlations with other equities, which I think comes as a surprise to some people, which really then provides a good diversification balance in the portfolio. I think what also makes REITs interesting for new investors is that if you're going to have an exposure to real estate, there really is no simpler or more inexpensive liquid way to access the commercial real estate asset class than through REITs. They, obviously, can be bought and sold through securities, or mutual funds, or ETFs on a daily basis. They are priced daily, which I think makes it easier to get into and out of and also easier to understand. But I do think all your new investors should definitely take a close look the way REITs are structured. They are required to pay out 90%, most pay out almost 100% of their income in the form of a dividend. So there is a great income component. I think what we find is that REITs really play a role in any age portfolio. So for people who are saving for retirement, you get that nice compounded return, that added benefit from income plus capital gains over a long period of time in a tax-deferred vehicle. Then for our investors who are in retirement or getting close to retirement, REITs really offer a really nice income stream through a robust dividend yield. The dividend yield on REITs is more than double that of the S&P 500, making it a nice income tool for any diversified portfolio.

Frankel: Excellent. So REITs are obviously a great fit for retirement accounts. REITs, they don't pay tax at the corporate level. If you put them into retirement account, you can really just avoid taxes on all sides. Do they make good investments for standard investment accounts as well if someone's not looking to invest in their IRA or something like that?

McCarthy: Yeah, I think REITs really play a role. I mean, it depends on your risk tolerance and your long-term investment goals. But Matt, as I was mentioning before, what we've really found is that an investment anywhere between 5% and 15% of a portfolio in REITs really provides that nice risk-adjusted return, that nice diversification benefit where you're adding return without increasing the risk of your overall portfolio and then also, really protecting it with those low correlations with other equities so that you can weather the up-markets and down-markets. That's true for any portfolio, whether you're saving for retirement or if this is in your general investment account.

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