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Buying REITs? Why You Shouldn’t Look at Dividends Alone

There’s a reason so many investors are big fans of REITs, or real estate investment trusts. REITs are companies that own and operate different properties, and they’re a great way to invest in real estate without having to take on the risks of buying property yourself.

Another big perk of owning REITs? Getting to collect dividends.

REITs are actually required to pay at least 90% of their taxable income to shareholders as dividends. Because of this, REITs commonly pay higher dividends than the average stock. And as an investor, that’s a good thing.

Image source: Getty Images.

Not only can steady, generous dividend payments help offset losses in your portfolio, but you can reinvest your dividends to keep building up your investment mix. Dividend income is also a very helpful thing to have during retirement, which is why REITs could be an investment you buy today and hold on to during your senior years.

But if you’re going to buy REITs, it’s important to not get too fixated on the dividends they pay. Doing so could lead you to make some poor choices.

Look at the whole picture

When it comes to buying REITs, there’s nothing wrong with seeing what sort of dividend yield you may be in line for. But that’s not the only thing you should look at.

Collecting dividends isn’t the only way to make money from REITs. In fact, you might make even more money by holding your REITs for many years and seeing their share price grow. But that also means choosing viable businesses with a lot of growth potential. And a given company’s dividend yield won’t necessarily correlate to its ability to grow and gain value over time.

That’s why it’s important to assess REITs as a whole, rather than base your investment choices on the dividend income you might collect. Specifically, break REITs down into industry and see which ones are generally more viable.

Retail REITs, for example, may be a less steady bet because in recent years, there’s been a major shift to online shopping. That could lead to store closures and force malls and shopping centers to shutter.

Industrial REITs, on the other hand, are poised to benefit from the recent e-commerce boom. And as demand for warehousing space soars, those REITs have the potential to grow.

Then there are healthcare REITs, which may not explode (in a good way) comparably to industrial REITs. But because healthcare is a fairly recession-proof industry, those might be a good bet for steady income and growth.

Dig into the numbers

REITs generally make their money by signing lucrative leases, so when evaluating REITs individually, take a look at what percentage of their properties are actively leased. You can also look at funds from operations (FFO) to see what different companies’ cash flow looks like.

Paying attention to expansion plans is important, too. REITs that keep acquiring properties in new markets could see their value increase in time.

In fact, there’s a lot of research you can do when it comes to buying REITs, and it pays to put in that legwork to choose the right companies for your portfolio. This isn’t to say that dividend yields shouldn’t be factored into your investing decisions. But dividend payments are really only a piece of the bigger pie, and getting too hung up on them could really lead you astray.

The Motley Fool has a disclosure policy.

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