Stocks and real estate investment trusts (REITs) offer long-term investment potential with strong historical performance and the possibility of continuing returns. While both stocks and REITs involve investing in assets, stocks represent ownership in company share, while REITs represent ownership in a trust that buys and manages real estate investments. Many investors believe stocks offer more aggressive growth opportunities, but some data suggests otherwise. Below, you’ll find an extensive comparison of stocks vs. REITs to decide how to use each investment class for your investment goals.
Stocks vs REITs: General Overview
| Stocks | REITs |
| Ownership of shares of a company. | Ownership of a trust that invests in real estate. |
| Can be in any sector, including tech, healthcare, finance or consumer goods. | Can only be real estate investments related to buying, selling, renting or managing real estate or mortgage products. |
| May or may not pay dividends depending on the individual company. | Must pay dividends equal to at least 90% of its taxable income each year. |
| May fluctuate in value due to company performance, industry trends, macroeconomic conditions and investor sentiment. | May fluctuate in value due to interest rate changes, occupancy rates, rental income and property valuations. |
| Stocks may generate capital gains or dividends that are subject to different tax rates, depending on the holding period and the investor's tax bracket. | Offer tax advantages for the REIT, although dividends received from REITs are generally taxed at the investor's ordinary income tax rate. |
Stocks vs. REITs: Extensive Comparison
Wondering whether you should invest in stocks vs. REITs? The comparison below can help identify the pros and cons of each.
1. Nature of Investment
REITs are investment vehicles that own and operate income-generating real estate properties, such as office buildings, shopping malls, apartments and hotels. When you invest in a REIT, you buy shares in a company that owns and manages these properties. Stocks represent ownership in a specific company, entitling shareholders to a portion of the company's profits and assets.
2. Asset Class
REITs belong to the real estate asset class, offering investors exposure to the real estate market. Stocks represent ownership in individual companies across various sectors, such as technology, healthcare, finance or consumer goods. Stocks offer a broader range of investment opportunities across different industries and sectors.
3. Income Generation
One of the primary attractions of REITs is their ability to generate consistent income for investors. REITs are required by law to distribute a significant portion of their earnings to shareholders in the form of dividends. In contrast, stocks may or may not provide regular dividends, depending on the individual company's profitability and dividend policy.
4. Risk and Volatility
Both REITs and stocks are subject to market risks and fluctuations. However, the nature of these risks may differ. REITs are often influenced by factors such as interest rate changes, occupancy rates, rental income and property valuations. Stocks are influenced by factors such as company performance, industry trends, macroeconomic conditions and investor sentiment.
Generally, stocks have higher volatility than REITs, as individual companies can be more prone to significant price swings. However, investors can choose a wide range of stocks, bonds, mutual funds, exchange-traded funds (ETFs) and other investments to mitigate risk. Speak with a financial adviser and research risk-mitigation strategies to build a portfolio appropriate to your risk.
5. Diversification
Investors can choose a diversified investment strategy that includes both REITs and stocks. Investing in REITs can provide diversification within the real estate sector, as REITs typically own and operate a portfolio of properties. This diversification can help mitigate risks associated with investing in individual properties. Stocks can offer diversification across various industries and sectors, allowing investors to spread their risk across different companies and market segments.
6. Accessibility
REITs and stocks offer comparable accessibility. Investing in REITs often requires less capital than directly purchasing real estate properties. Many REITs are traded on public exchanges, making them more accessible to individual investors than real estate. Stocks are also easily accessible through brokerage accounts, and investors can buy and sell shares according to their preferences.
7. Tax Considerations
REITs are subject to specific tax rules. They are required to distribute at least 90% of their taxable income to shareholders, and as a result, they often enjoy tax advantages. The dividends received from REITs offer an additional income stream and are generally taxed at the investor's ordinary income tax rate. Stocks may generate capital gains or dividends that are subject to different tax rates, depending on the holding period and the investor's tax bracket.
REITs vs. Stocks: Which One is Right For You?
Each investor will need to decide, based on their investment time horizon, risk tolerance, initial capital, investment objectives and other factors, whether REITs or stocks are right for them. You should weigh your own investment goals, portfolio diversification, total invested capital and risk to consider whether REITs or stocks are better.
REITs and stocks offer different volatility and market risk factors. Diversifying across different asset classes, including stocks and real estate, can be an effective approach to building a well-rounded investment portfolio for many investors.
REIT vs. Stocks
REITs vs. stocks offer pros and cons, making them two parts of a diversified investment portfolio along with other asset classes. Considering REITs vs. dividend stocks can offer comparable returns and risks.
While it’s true that REITs have outperformed the S&P 500 over the last 50-, 25-, 20-, 10- and 5-year reporting periods, those are averages. Individual performance varies, which is why diversification across asset classes and investment types is essential.
Consider mutual funds, ETFs or other investment vehicles, along with stocks and REITs, to manage risk exposure and create a personalized strategy for long-term wealth. For most investors, it’s not a question of REITs vs. stocks; the answer is both.
Frequently Asked Questions
Are REITs a better investment than stocks?
REIT returns and stock returns are comparable, but it depends on individual performance. Rather than trying to pick one asset or asset class that is better than another, consider a diversified investment strategy that includes many different asset classes, including stocks, bonds, real estate and other investments to spread risk and capture different growth opportunities.
Are REITs riskier than stocks?
No, REITs in general aren’t any riskier than stocks, although individual REITs or stocks can have different performance and risk factors. Before investing in REITs or stocks, understand the company, its historical performance and current financial reports and positions.
Do REITs beat the S&P 500?
When comparing REITs vs S&P 500, over the last 20-, 25- and 50-year reporting periods, REITs have outperformed the S&P 500. REITs also outperformed the S&P 500 over 2021, the last full year reported.
About Alison Plaut
Alison Kimberly is a freelance content writer with a Sustainable MBA, uniquely qualified to help individuals and businesses achieve the triple bottom line of environmental, social, and financial profitability. She has been writing for various non-profit organizations for 15+ years. When not writing, you will find her promoting education and meditation in the developing world, or hiking and enjoying nature.