Many investors love the idea of sitting back and earning passive income. And if that's a goal of yours, it could pay to start dabbling in REITs.
Short for real estate investment trusts, REITs derive revenue by owning and operating different properties. What makes REITs a great investment is that they offer two options for growing wealth.
First, like regular stocks, REIT shares can gain value over time. If you hold yours for many years, you might see their value increase substantially.
Secondly, REITs are actually required to pay at least 90% of their taxable income to shareholders as dividends. Because of this, they commonly pay higher dividends than your average stock. And those dividend payments can serve as a nice, steady passive income stream.
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If you're new to REITs, the idea of buying them may be overwhelming. But here's how you can start incorporating them into your portfolio.
1. Commit to a monthly goal
Are you looking to invest $300 a month in REITs? Or can you swing $500 a month? Either way, it's a good idea to commit to a monthly investment target and stick with it, no matter how well the stock market happens to be doing at that time. This is known as dollar-cost averaging, and it pays to apply it to REIT purchases as well.
2. Research different REIT sectors
Within the realm of REITs, there are different sectors you can choose to invest in. It's a good idea to narrow those down rather than buy REITs at random.
One thing you may want to consider in this regard is whether you'd rather buy REITs with the potential for explosive growth, or if you'd rather buy REITs that will likely lend to slower but predictable income over time. If you're drawn to the former, you may want to look at a booming sector like industrial REITs or data center REITs. But if you'd rather own REIT shares within a segment that's more stable and recession-proof, healthcare REITs could be a good choice.
3. Do a deep dive into specific companies within each sector
Once you narrow down your preferred REIT segments, you'll need to figure out which companies to put your money into. In this regard, you'll want to look at financials -- how different companies are doing on cash flow and the extent to which their properties are leased out. You may also want to favor REITs that have branched out into new markets in recent years and have plans to continue doing so.
Of course, you can also look at dividend yields when choosing your specific REITs. But don't get too hung up on dividends alone, as that's only a piece of the big picture. Remember, it's possible for a given REIT to not pay the most generous dividend but have a lot of growth potential, so that what you lose in dividend income, you gain in share price appreciation.
A great way to grow wealth
Many investors do quite well for themselves by loading up on REITs. Follow these tips to get started and enjoy the many benefits involved.
