Benefits of REITs to Investors
In contrast to government bonds and other assets, REITs offer appealing dividend returns that drive many investors to purchase them. However, there are a lot more, equally strong arguments for why REITs should be a component of a well-balanced portfolio.
Equity REITs’ compound annual returns have outperformed those of the S&P 500 Index and, on average, REIT dividend growth outpaces inflation (as measured by changes in the Consumer Price Index), making REITs a potent inflation hedge.
A number of studies have demonstrated that investing in REITs can reduce risk and boost returns on a portfolio of stocks and bonds, making REITs another useful tool for diversification. Last but not least, buying REITs gives investors a method to boost real estate profits without taking on the liquidity risk that comes with direct real estate investments.
Let’s check out a few benefits of REITs to Investors pointwise
One of the main benefits of investing in REITs is the dividend income it provides, in large part because its yields are attractively higher than those of other assets.
If a REIT has well-located assets that are competitively managed and a balance sheet that is properly leveraged, REITs are a desirable investment for those seeking current income.
When a REIT exhibits these characteristics, its dividend to stockholders can often be sustained, and ideally increased.
Double-digit Total Returns
Total returns on stock investments for investors are computed as the sum of dividends received plus any price increases (or decreases, if any) that occurred while the stock was owned. Because of their tempting present yields, REITs have generally produced long-term annualized total returns of 8–12%.
REITs are a tested strategy for portfolio management diversification, as shown in several studies by numerous illustrious financial advising firms using varied approaches, data sources, and time periods.
Compared to a portfolio of the same size that does not include an allocation to equity REIT, one that is invested in a mix of stocks, bonds, and equity REIT shares generates higher returns and entails lower risk.
After bonds and stocks, real estate is the third biggest financial asset that investors are interested in investing in for portfolio diversity.
Superior Risk-Adjusted Return
Interest rates and market conditions have a significant impact on the returns of real estate stocks. An investment’s risk-adjusted return is its total return adjusted to reflect the risk, as measured by volatility, associated with earning that return.
Investors can increase their real estate profits without taking on the liquidity risk associated with direct real estate ownership by using publicly listed REITs. This is due to the fact that common shares of REITs that are listed on stock exchanges may be quickly acquired or sold through a financial adviser or internet trading services, much like other equities.
Hedge against Inflation
Leases and lease terms used by equity REITs to rent out their buildings to tenants have a tendency to shield the operating margins of the REITs from the negative impacts of inflation.
The operating margin of a REIT is similar to the gross margin of a manufacturing corporation, with real estate income serving as sales and property running costs (such as rent or management fees, utilities, taxes, and insurance) serving as costs of goods sold.
Transparent Corporate Structures
Because real estate and the leases that generate rental income are tangible, the REIT industry’s performance is very visible. Additionally, publicly listed REITs are subject to intense quarterly analyst and investor scrutiny. In the United States, hundreds of companies hire at least one stock analyst to do equities research on REITs.