Inflation has reared its ugly head, and the federal government has responded with a cost-of-living adjustment (COLA) raise of 5.9%, the largest in about four decades. That's welcome news to the 47 million or so retired Americans who depend on that monthly payment.
However, how to supplement that fixed income is an individual choice. It could be a while before interest rates make much impact on the minimal returns from such fixed-rate sources as CDs, bank and credit union savings accounts, and even bonds.
Investors who want to boost their yield while reducing risks in the stock market should consider real estate investment trusts (REITs). These companies are required by tax law to pass at least 90% of their taxable income on to investors -- income they generate as owners and/or operators of a wide range of real estate.
Here are three REITs to consider that not only have years of solid returns but have also raised their dividends each year for at least nine years, helping their investors keep up with rising prices over that span. As a bonus, each of these REITs is among the small group of REITs that pay monthly (instead of quarterly), adding to their appeal as a supplement to monthly Social Security payments.
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Agree Realty
Agree Realty (ADC -0.76%) has a portfolio of about 1,400 properties in 47 states that it leases to what it calls industry-leading, omnichannel retail tenants. This suburban Detroit-based REIT boasts compound annualized dividend growth of 5.5% over the past 10 years.
Agree is growing its portfolio as well as its payouts. The company invested about $343 million in 83 net-lease retail properties in the third quarter. That will add more cash flow to a portfolio that's now 99.6% leased, with the average lease having 9.5 years left to run. Plus, 66.9% of Agree's rent is from investment-grade retail tenants.
Agree Realty has been trading at about $69 a share and yielding about 3.95%. The monthly dividend for the Jan. 14 payout was $0.227 per share, a 9.8% increase from the year-ago month. Thus, a $10,000 investment in Agree Realty stock would buy you about 145 shares and pay you about $32.90 a month.
Realty Income
Realty Income (O 0.00%) has a portfolio of more than 11,000 properties occupied by 650 different clients in all 50 states, the United Kingdom, and Spain. This San Diego-based REIT is one of the most popular real estate investments on the market, in no small part because of 97 straight quarters of dividend increases atop a record of more than 50 years of not missing a monthly payout. That dividend has increased nearly 25% in the past five years
Realty Income has been trading at about $70 a share and yielding about 4.13%. The monthly dividend for the Jan. 14 payout was $0.2465 per share. Thus, a $10,000 investment in Realty Income stock would buy you about 143 shares and pay you about $35.20 a month.
The company is making moves to keep the momentum, investing a record $3.78 billion in its properties in 2021 (including its first in continental Europe), acquiring rival VEREIT, and spinning off its office properties into a new publicly traded firm called Orion Office REIT. The company also is projecting a 9.2% jump in 2022 in adjusted funds from operations (FFO), a critical measure of a REIT's cash flow.
STAG Industrial
STAG Industrial (STAG 0.08%) has a portfolio of 517 single-tenant industrial buildings spread across 40 states. This Boston-based REIT was founded in 2010 and went public in 2011. Since then, the company has posted nine straight years of dividend increases.
Signs point to more to come. The company bought 24 buildings in 3Q21, adding 4 million square feet to its portfolio, and was able to raise the rent by 14.7% on 3.7 million square feet in new and renewed leases in the quarter. Plus, 97% of the available space in the entire portfolio is leased, ensuring health income flow from a portfolio that has reached 103 million square feet.
STAG Industrial has been trading at about $44 a share and yielding about 3.24%. The monthly dividend for the Jan. 18 payout was $0.121 per share. Thus, a $10,000 investment in STAG Industrial stock would buy you about 227 shares and pay you about $27.50 a month.
Nothing is certain, but these are good choices to consider
REITs can nicely supplement the income from all those years in taxes that the typical retiree paid into Social Security, plus likely appreciation in share price. Each of these three choices could be a suitable place to put that strategy into play to help reduce the income uncertainty in your retirement years.
Marc Rapport has no position in any of the stocks mentioned. The Motley Fool owns and recommends Stag Industrial. The Motley Fool has a disclosure policy.
FAQs
REITs are a Potent Source for Retirement Income
On average, 70% of the annual dividends paid by REITs qualify as ordinary taxable income, 15% qualify as return of capital, and 16% qualify as long-term capital gains. Most income distributed from REITs is taxed as ordinary income rather than as dividend income.
What is the 90% rule for REITs? ›
How to Qualify as a REIT? To qualify as a REIT, a company must have the bulk of its assets and income connected to real estate investment and must distribute at least 90 percent of its taxable income to shareholders annually in the form of dividends.
What are the downsides of REITs? ›
Non-traded REITs have little liquidity, meaning it's difficult for investors to sell them. Publicly traded REITs have the risk of losing value as interest rates rise, which typically sends investment capital into bonds.
What is the 75 income test for REITs? ›
For each tax year, the REIT must derive: at least 75 percent of its gross income from real property-related sources; and. at least 95 percent of its gross income from real property-related sources, dividends, interest, securities, and certain mineral royalty income.
Should seniors invest in REITs? ›
Retirees are often advised to hold dividend stocks in their portfolios to generate ongoing income. And REITs fit right into that strategy. REITs are actually required to pay at least 90% of their taxable income to shareholders as dividends, which explains why they commonly offer higher dividends than typical stocks.
How much of my retirement should be in REITs? ›
“I recommend REITs within a managed portfolio,” Devine said, noting that most investors should limit their REIT exposure to between 2 percent and 5 percent of their overall portfolio. Here again, a financial professional can help you determine what percentage of your portfolio you should allocate toward REITs, if any.
How long should I hold a REIT? ›
Is Five Years the Standard "Hold" Time for a Real Estate Investment? Real estate investment trusts (REITS) and other commercial property investment companies frequently target properties with a five-year outlook potential.
How many REITs should I own? ›
Richards: A lot of financial planning model portfolios suggest a 5% allocation to REITs.
What is the REIT 10-year rule? ›
The final regulations (i) provide a 10-year “transition rule” that grandfathers current structures, subject to certain requirements, and thus allows certain entities to continue to be treated as D-REITs for ten years and (ii) narrow the scope of the “look through” rule, pursuant to which REIT stock owned by certain ...
What I wish I knew before buying REITs? ›
A lot of REIT investors focus too way much on the dividend yield. They think that a high dividend yield implies that a REIT is cheap and a good investment opportunity. In reality, it is often the opposite, and the dividend does not say much, if anything, about the valuation of a REIT.
REITs historically perform well during and after recessions | Pensions & Investments.
What happens to REITs when interest rates go down? ›
REITs. When interest rates are falling, dependable, regular income investments become harder to find. This benefits high-quality real estate investment trusts, or REITs. Strictly speaking, REITs are not fixed-income securities; their dividends are not predetermined but are based on income generated from real estate.
How often do REITs pay income? ›
REITs and stocks can both pay dividends, usually on a monthly, quarterly, or yearly basis. Some investments will also offer special dividends, but they're unpredictable. There is a difference between the dividends paid by stocks and REITs though.
Are REITs good for income? ›
They historically offer competitive long-term performance, with consistent returns compared to stocks and bonds. REITs provide attractive income through dividends, liquidity, transparency, and diversification, enhancing risk-adjusted returns.
How much bad income can a REIT have? ›
Bad REIT earnings tend to run afoul of Section 856, which provides that at least 95% of a REIT's gross income must be derived from “rents from real property.” It also provides that at least 75% of its gross income must be derived from that source.
Are REITs good for a 401k? ›
REIT Attributes: High and Stable Income, Long-term Capital Appreciation, Diversification and Inflation Protection. REITs are an important part of retirement portfolios because they provide income, capital appreciation, diversification, and inflation protection.
Are REITs a good investment for IRA? ›
Every year, shareholders receive a minimum of 90% of the REIT's taxable income as dividends. If an investor is looking for a relatively simple way to invest in real estate through their Roth IRA, a REIT may be the ideal solution. Both share distinct tax benefits that can become even more fruitful when combined.
Can I invest my 401k in REITs? ›
Some REITs trade publicly on stock exchanges, which means you can invest in a REIT through an IRA — and might be able to invest through your 401(k).
