Three Benefit’s to Holding REIT’s in Your Portfolio
We have included REIT’s in our client portfolios since 1995, they are an important part of a balanced allocation for three reasons:
The return for REITS has been exceptional over the years and in fact they have provided more return than large company stocks since 1991:
Their annualized return has been 11.1% since 1991 while large cap stocks have an annualized return of 10.5% since 1991. While REIT’s have been more volatile their addition to a portfolio reduces the overall volatility for the entire portfolio especially if the portfolio is periodically rebalanced.
- Diversification Value:
Because REIT’s are not completely “correlated” with the other investments we hold in a portfolio, adding them improves portfolio performance. While there are instances where REIT values have dropped concurrent with the stock market (2008 and 2020), something called the yield effect offsets the decline more than the yield of the stock market. Yields on REIT’s have been much higher historically than the stock market.
- High Yield:
As mentioned, REIT yields have historically been much higher than stock dividend yields and bond yields (since 1991):
Right now, the trailing 360-day yield for the REIT funds we use is in the 6-9% range. Unfortunately the income generated by REIT’s is not considered a “qualified” dividend under current tax law so instead of being taxed at the same rate as capital gains (0%, 15%, or 20%) they are taxed as ordinary income with a top rate of 37%. Usually we try to have tax-deferred accounts as the containers for your holdings in REIT’s
For more information on what we consider when adding REITs to our clients’ portfolios please watch our video: