REITs Versus Bonds As Yield Investments

Investors who are seeking the highest — but safest — yields possible eventually compare real estate investment trusts (REITs) with bonds. This is especially true for retirees who want to make the most of their retirement funds. They want the highest yields possible, but they don’t want to risk their principal. 

In order to compare REITs with bonds, take a look at the breakdown of these two asset types:

REITs

• Equity investment in a wide-ranging portfolio of properties or mortgages
• Dividends pay quarterly and some pay monthly
• Dividends can increase
• No specific maturity date
• Value can grow 
• Value depends on the performance of properties in portfolio
• Shares can be purchased through a broker, in the shares of an exchange-traded ufnd (ETF) or in a mutual fund. REITs can also be privately traded 

Bonds

• Debt instrument issued by companies and government entities with a promise to repay the principal plus Interest in a defined time period 
• Interest pays every six months
• Fixed interest
• Set maturity date
• Matures at face value (usually $1,000)
• Value depends on the financial strength of the issuer
• Bonds can be purchased through a broker (usually in increments of $1,000), in the shares of an ETF or in a bond mutual fund. U.S. Treasury bills, notes 

Comparing A REIT And A Bond

Here is an example of how a corporate bond and a REIT compare: 

• An investor can purchase an S&P A-rated Cigna bond from an online broker that matures March 15, 2031, at $1,000. This is a callable bond that yields 2.375%. It can be purchased for $843.93, which gives it a yield to maturity of 4.615%. 
• Now compare that Cigna corporate bond with the Arbor Realty Trust Inc. REIT. Closing price per share on Oct. 10, 2022, was $11.64. There is no maturity date, and it yields 12.96%. 
• If you were an investor searching for the best income investment for your retirement funds, what would you choose between these two investments — the corporate bond or the REIT?

Taxation Of REIT Dividends And Bond Interest

Although there are a number of differences between REITs and bonds, there are also some similarities. Both REITs and bonds are sensitive to interest rate changes by the Federal Reserve. REIT dividends and corporate bond interest are also taxed as ordinary income. However, the National Association of Real Estate Investment Trusts (NAREIT) reports that REIT dividends can actually be divided into three categories for tax purposes: ordinary income, capital gains and return of capital. 

It should be noted that the interest of U.S. Treasury bills, notes and bonds are subject to federal income tax but not state income taxes. Many municipal bonds (issued by U.S. municipalities) are exempt from federal income tax and some are exempt from both state and federal income tax. Some people invest their retirement funds in U.S. Treasuries because of their safety. Usually munis — a nickname for tax-free municipal bonds — are not used in retirement accounts. 

So REITs or bonds? What do you prefer? 

Read next: This Little-Known REIT Is Producing Double-Digit Returns In A Bear Market: How?

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