REITs vs dividend stocks: which offers a better passive income?

Here are the positive and negative aspects of investing in REITs and dividend stocks.

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Real estate investment trusts (REITs) are a popular means of generating a passive income. They provide the opportunity to invest in a range of properties through buying part of the company that owns them. They are traded on the stock exchange, which can make them more liquid than investing in an open-ended property fund.

However, do they offer a superior means of generating a passive income compared to dividend stocks? Or, should investors seek to own a wide range of companies, rather than simply buying REITs?

Returns

There are strict rules on dividend payments for REITs. They must distribute at least 90% of their income to shareholders in order to quality for REIT status. This means that shareholders are guaranteed to benefit from any uplift in their income, which may lead to a higher dividend return in the long run.

By contrast, dividend stocks face no such requirement. It is entirely up to their management team as to how much, if any, income is paid out as a dividend. For some companies, they may wish to pay out a high percentage of income as a dividend. This may include mature companies, for example, who do not require large amounts of reinvestment.

In some cases, of course, dividend policies can change. For example, a new management team may place less importance on dividends, which could lead to slower growth in income returns for investors.

Risks

While REITs offer investors the opportunity to buy a range of properties through owning the stock of a single company, they lack diversity when compared to dividend stocks. In other words, it is possible to build a portfolio of dividend stocks that operate in a variety of industries, so that if a particular segment of the economy underperforms an investor is not over-exposed.

REITs ultimately are only focused on property. Therefore, should property prices fail to rise, or demand for property falls, they could experience disappointing returns. This lack of diversity means that their risk versus owning a range of dividend stocks could be relatively high.

Investment prospects

For many investors, buying property is an appealing idea. Property prices have generally performed well since the financial crisis, and have a long track of growth in a wide range of economies. Therefore, owning REITs has appeal from an income perspective.

However, solely focusing on REITs could leave an investor over-exposed to the property sector, while not being able to benefit from the prospect of rapid dividend growth in a range of other industries.

Therefore, it may be prudent to own a range of dividend stocks, as well as REITs, in order to generate a passive income. Doing so may allow an investor to access a wide range of income sources in order to reduce risk, while also benefitting from the growth potential of a number of different industries – including the property segment.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

More on Investing Articles

British flag, Big Ben, Houses of Parliament and British flag composition
Investing Articles

Here’s how much income I’d get if I invested my entire £20k ISA in cheap BT shares

BT shares are on the up but still cheap, while the FTSE 100 telecoms stock offers a good yield too.…

Read more »

Investing Articles

2 FTSE dividend shares yielding more than 6% with P/Es of less than 9!

Harvey Jones picks out two brilliant FTSE 100 dividend shares that yield more than 6% but are selling at strangely…

Read more »

Investing Articles

Up 105% in a year! Is this rocketing FTSE bank the perfect pick for my Stocks and Shares ISA?

Harvey Jones is drawing up a shortlist of stocks to purchase inside his Stocks and Shares ISA allowance. This FTSE…

Read more »

Investing Articles

Down 78%, is this once-hot AI growth stock set to explode like the Rolls-Royce share price?

Our writer asks if he should invest in Super Micro Computer (NASDAQ:SMCI) following the growth stock's massive recent decline.

Read more »

Investing Articles

Is it madness to buy Palantir shares after Q3 earnings?

Palantir stock's surging again after the firm's Q3 earnings report. But after a 150% gain, is it too late to…

Read more »

A pastel colored growing graph with rising rocket.
Investing Articles

£6,000 in savings? Here’s how I’d aim to turn that into £1,032 a month of passive income!

A small investment in high-dividend-paying stocks with the returns used to buy more shares can generate big passive income over…

Read more »

Chalkboard representation of risk versus reward on a pair of scales
Investing Articles

As Lloyds’ share price tumbles 14%, is this an unmissable opportunity for me to buy at a bargain-basement price?

The Lloyds share price is substantially below its year high, but decent earnings prospects should drive its price and dividend…

Read more »

The flag of the United States of America flying in front of the Capitol building
Investing Articles

2 UK shares that could rise if Trump wins the Presidential election

These UK shares are among the FTSE 100's most popular stocks. And they could rise in value if Donald Trump…

Read more »