Real estate investment trusts are a solution for retirees looking for investment income and protection from inflation.
Real estate investment trusts, or REITs, are companies that own and/or operate properties like office buildings, shopping malls, apartment complexes and warehouses. They pay dividends and can be strong performers in inflationary environments, even though they come with more risk than other income producing investments.
Marco Rimassa, president of CFE Financial in Texas, said that REITs tend to do well in times of inflation because of their ability to increase rents.
The consumer price index, which measures the cost of a wide-ranging basket of goods and services, was up 6.8% in November from a year earlier, which has become a concern for investors. This is the fastest pace of inflation since 1982.
The US is home to over a trillion dollars invested in U.S. REITs. Due to their legal structure, REITs are required to pay out most of their income in the form of dividends. Rimassa said those payments are made quarterly or monthly.
According to NAREIT, the average yield on REITs is 3%. The yield on the 10-year Treasury bond is the bellwether.
The U.S. REIT index has returned 33.3% so far this year. The S&P 500 Index has gained 27.2% in the year to date.
Regardless of what inflation is doing, not all REITs perform the same.
Kevin Brown said that it comes down to the underlying business. There are a lot of different sectors.
What drives a hotel's success is different from what drives a senior housing facility or warehouse space.
Brown said that a real estate company isn't like every other one.
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Rents and property values tend to increase when prices do, so the REITs whose properties are able to take advantage of that can provide an inflation hedge.
As tenants turn over, apartment buildings can push up rents more easily. Bigger dividends are usually paid to shareholders when the income of the REIT is higher.
Retailers at shopping malls can expect to see their annual increases built in based on the movement of the consumer price index. Rent hikes tend to have a limit on how big of a jump can occur, which means inflation could surpass those increases.
Even if rent increases are not able to keep pace with inflation in the short term, the property values are still increasing.
The easiest way to get exposure to many real estate companies is through a mutual fund. Rimassa said that 10% of your stock allocation could go to REITs.
If you hold REITs outside of a tax-advantaged retirement account, their taxation can get tricky.
You can take a 20% pass-through deduction on some of the income, but the dividends are subject to ordinary income tax rates. It is wise to get guidance from a tax advisor.
