E Why Income Investors Should Consider REIT ETFs

Income investors are primarily concerned with generating sufficient income from their investments. The challenge is that interest rates remain very low, while stock prices are at record highs. The end result is that high yields are hard to find, particularly if investors are also concerned with safe dividend payouts.

One suitable alternative for income investors is to consider Real Estate Investment Trusts (also referred to as REITs). Investors can purchase individual REITs, but this involves individual company risk. On the other hand, investors can invest in a basket of REITs at once through a REIT ETF.

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Why REITs Are Appealing For Income Investors

The obvious appeal for REITs is that they pay strong dividend yields, well in excess of many other asset classes. For example, the average dividend yield of the S&P 500 Index is just 1.5% right now. And with the 10-year U.S. Treasury Bond yielding just 1.6%, fixed income is not much better in the way of yield.

This is where REITs come in. Many individual REITs yield 5% or more right now. However, investors may want to avoid buying one individual REIT, as this exposes the investor to higher risk and volatility. Fortunately, investors can still gain exposure to real estate with the added benefit of diversification and lower volatility through exchange-traded funds, or ETFs.

Exchange-traded funds have become increasingly in demand for investors over the past few years, as they offer greater liquidity and lower fees than traditional mutual funds. As a result, REIT ETFs create a win-win for investors—high income, reliable dividend payouts, and diversification all in one.

Top REIT ETFs Right Now

For investors primarily concerned with safe dividends, we recommend the Vanguard Real Estate ETF (VNQ), the largest REIT ETF with over $36 billion in assets under management. Vanguard ETFs are widely known for their top-quality holdings, which reduces risk, as well as their low expense ratios. Indeed, VNQ has an extremely low expense ratio at 0.12%. To be sure, the high relative safety and low expense ratio carries a trade-off, which is a relatively lower yield of 3.3%. Although, it is worth mentioning this is still more than double the average yield of the S&P 500 Index.

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Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.

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William K. 3 weeks ago Member's comment

The REITs sound a lot like those mortgage packages that were sold as good investments a few years back. The ones that were poor risks and had a lot of defaults and caused a whole lot of grief? Or is tis somehow different??