REITs (Real Estate Investment Trusts) are investments that invest in real estate and pay profits in the form of dividends without the need for the investor to own the real estate directly. REITs must distribute at least 90% of profits to shareholders. Dividends are variously paid annually, quarterly, and monthly.
REITs are not only attractive investment destinations with a high dividend yield, but their great advantage is that they can get contractual benefits without owning real estate. It is also easy to buy and sell like stocks. From the perspective of asset allocation to the investment portfolio, you can lower the risk by investing through REITs at an appropriate ratio in real estate.
Before investing in REITs, I will explain in 4 steps investors need to know.
1. REITs dividend tax system
There are two taxes applied to the dividend payment process, depending on the entity. The first is a tax levied on the company itself, and the second is a tax applied to dividends when paid as dividends.
REITs do not apply normal corporate tax, but are applied as limited liability corporations (LLCs), levying a single tax when profits are paid to shareholders. When paid in the form of dividends of a general company, it is a form of double taxation in which shareholders pay taxes to the government when the profits of the company are paid to the government once as tax and the remaining profits are paid in the form of dividends. By investing REITs such double taxation can be avoided. The return from REITs to shareholders is greater than dividend investment in common stock.
2. Comparison of REITs and dividend stock investment
Since REITs aren't the only dividend investing, you have to decide which investments will be proper for investors. Taxes imposed on dividends are as described above. If so, you need to know how to determine the dividend for each of the remaining investments.
REITs' profits are contractual gains between the tenant and the real estate owner, and the cash flow is relatively stable and fixed. Therefore, the most important thing investors should consider when investing in REITs is whether the vacancy rate of real estate owned by REITs is increasing and whether the tenant's business is running stably. If the vacancy rate is high and the tenant is on the verge of bankruptcy, of course, the profits of that property will inevitably decrease.
When investing in dividends with common stock, you need to see if the company can generate enough cash flow to pay dividends. Since it is a business that makes profits by providing goods and services, it is important to check whether the financial soundness that is always emphasized is excellent. Excessive corporate debt is always a risk factor for all investors, not just dividend investors.
3. Comparison of dividends by REITs types
If you decide to invest in REITs, you are left with what kind of REITs to invest in. REITs come in many types, including real estate, commercial offices, residential apartments and houses, and buildings. The dividend paid depends on what assets REITs own. However, REITs usually have higher dividend yields than common stocks.
If there are REITs that need special attention, they are REITs that own assets in the form of taxation from individual tenants. It should be taken into account that even with high dividend yields, contracts with individuals are less reliable than contracts with companies.
4. REITs investment method
First, we compare various types of REITs with dividend yield. After that, we check how the REITs' performance has moved in response to changes in interest rates and economic conditions affecting assets. You can invest in individual REITs or use ETFs. In this case, the office sector sensitive to the economy is not suitable for long-term investment because the contract period is short. It's an age-old rule but emphasize again. 'It's best to invest in REITs that you understand.'
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