Investments that produce income are hot right now, and real estate investment trusts in particular have high yields and tax advantages. But are REITs still a smart investment right now?

In the following video, Dan Caplinger, the Fool's director of investment planning, looks at whether REITs are still a tax-smart choice for investors. Dan notes that mortgage REITs Annaly Capital (NYSE:NLY) and American Capital Agency (NASDAQ:AGNC) have dominated investors' attention in the REIT space for years, given their double-digit yields. But as interest rates have started to rise, shares of Annaly and American Capital Agency have dropped, raising questions about REITs generally. Dan goes on to observe, though, that other REITs with actual real-estate holdings rather than just the mortgage-backed securities that Annaly and American Capital own could have better growth prospects. He points to Simon Property Group (NYSE:SPG) and Public Storage (NYSE:PSA) as two REITs with different types of exposure to real estate. In addition, the Vanguard REIT ETF (NYSEMKT:VNQ) is just one way you can get exposure to a broader selection of real estate investment trusts.

Dan concludes with a discussion of the tax advantages of real estate investment trusts, with REITs not having to pay corporate tax. However, most REITs don't qualify for favored dividend-tax status, costing investors more on the dividends they receive than on dividends from regular stocks. In the end, Dan concludes that favorable trends in the real-estate market will probably be the key driver of growth for REITs in the future.

Fool contributor Dan Caplinger owns shares of Vanguard REIT ETF. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.