Key Takeaways
- REITs must distribute at least 90% of taxable income as dividends, producing high yields
- Typical REIT yields range from 3% to 8%, well above the S&P 500 average
- Most REIT dividends are taxed as ordinary income, not at the lower qualified rate
- REITs provide real estate exposure without directly owning property
Real Estate Investment Trusts (REITs) are companies that own, operate, or finance income-producing real estate. By law, REITs must distribute at least 90% of their taxable income to shareholders as dividends, which is why they consistently offer some of the highest yields in the stock market. This structure makes REITs a cornerstone of many dividend income portfolios.
How REITs Work
REITs pool investor capital to purchase and manage real estate assets. When tenants pay rent, that income flows through to shareholders as dividends. The 90% distribution requirement means REITs retain very little earnings, instead paying out nearly all profits. This creates a steady income stream but also means REITs must frequently raise capital through stock issuance or debt to fund growth.
There are three main types: Equity REITs own and operate properties (the most common), Mortgage REITs invest in real estate debt, and Hybrid REITs do both. For dividend investors, equity REITs like Realty Income (O) and Prologis (PLD) are typically preferred for their more predictable income streams.
REIT Yields by Property Type
- Net Lease REITs: 4-6% yield. Tenants pay all property expenses. Examples: Realty Income, NNN REIT
- Residential REITs: 3-4% yield. Apartment buildings and single-family rentals
- Industrial REITs: 2-4% yield. Warehouses and distribution centers
- Office REITs: 4-7% yield. Higher yields reflect post-pandemic uncertainty
- Mortgage REITs: 8-14% yield. Highest yields but most volatile
Tax Considerations
Most REIT dividends are classified as ordinary income, not qualified dividends, meaning they are taxed at your regular income tax rate rather than the lower capital gains rate. However, the Section 199A deduction allows a 20% deduction on REIT dividends for many taxpayers. Because of this tax treatment, REITs are often best held in tax-advantaged accounts like IRAs. See our guide on REIT dividend taxes for details.
Evaluating REIT Dividends
Traditional metrics like earnings per share do not work well for REITs because depreciation charges reduce reported earnings below actual cash flow. Instead, use Funds from Operations (FFO) or Adjusted FFO (AFFO) to evaluate profitability and dividend coverage. A REIT with an AFFO payout ratio below 85% generally has a sustainable dividend with room for growth. Learn more about payout evaluation in our payout ratio guide.
Frequently Asked Questions
Are REIT dividends qualified?
Most are not. The majority of REIT dividends are taxed as ordinary income. A small portion may be classified as return of capital or capital gains, which receive different tax treatment.
What is the best REIT for monthly income?
Realty Income (O) is widely considered the gold standard for monthly REIT dividends, with 650+ consecutive monthly payments. See our Realty Income analysis.
Should I hold REITs in a taxable account or IRA?
Generally, REITs are better held in tax-advantaged accounts (IRA, 401k) because their dividends are taxed at ordinary income rates. In a Roth IRA, REIT dividends grow completely tax-free.