Real estate investment trusts, or REITs, and bonds both pay investors an attractive rate of income. This is about the only feature they have in common. REITs offer an equity investment, providing ownership in a business. When you buy a bond, you're loaning money to the bond's issuer in return for a rate of interest and return of principal upon maturity of the bond.
An investor looking for income out of his investment portfolio has a range of choices. Bonds are the traditional choice. Bonds are debt securities that pay a fixed rate of interest and the principal at maturity. Other income choices include dividend stocks, mortgage-backed securities, master limited partnership shares and REIT shares. The yields on these investment choices can range from very low on short-term U.S. Treasury bonds to more than 10 percent from high-yield stocks or junk bonds.
Real Estate Exposure
REIT shares provide investors with an opportunity to have real estate exposure in their investment portfolios. A REIT is a company that owns either commercial property or mortgage securities. The tax rules require a REIT to pay out at least 90 percent of the company's net income as distributions to investors. The result of this rule is most REIT stocks pay attractive dividend yields. The value of REIT shares can increase if the value of commercial property increases or if the REIT management is able to increase property rents and increase the dividend payout rate.
Bonds are fixed-income investments. They do not offer the potential of share price growth like REIT shares. On the flip side, a bond promises the repayment of the face value when a bond matures. The value of REIT shares could decline significantly, even to the point of the company going bankrupt. Bond investing is about the rate of interest to be earned based on the credit rating of the issuer and current market rates. Conservative bond investments will be the stable portion of an investor's portfolio.
Unlike the dividends from regular corporations, which qualify for lower tax rates, the distributions received from REIT shares are taxed at the investor's marginal income tax rate. Consideration should be given to buying REIT shares in an IRA account in order to minimize the tax consequences. Interest from government and corporate bonds is also fully taxable. However, an investor in a high income tax bracket can also invest in municipal bonds, which pay interest exempt from income taxes.
- Hemera Technologies/AbleStock.com/Getty Images