Choosing the top real estate investment trusts (REITs) goes beyond a surface-level review of the sector. At their core, REITs concentrate on investing in properties. Yet, the best-performing REITs often specialize in specific market segments and their success is determined by a variety of factors, not limited to just mortgage rates or general market trends.
Moreover, savvy investors often seek out REITs with a track record of growing dividends, necessitating a forward-looking approach that sees beyond short-term market turbulence to the enduring promise of consistent returns.
This article will introduce you to the fundamentals of investing in real estate investment trusts and guide you on how to identify the most promising REIT stocks.
Disclaimer: This article does not constitute individualized investment advice. These funds appear for your consideration and not as investment recommendations. Act at your own discretion.
Editor’s Note: All tabular information contained in this article is up-to-date as of Aug. 31, 2024.
Table of Contents
What Are Real Estate Investment Trusts (REITs)?
A real estate investment trust, often referred to as a REIT (pronounced “reet”) is a unique class of investment. But if you break down each of those terms that make up the name of this asset, it will begin to make more sense.
The first two words designate the kinds of companies you’ll be investing in. All REITs are companies that must have at least 75% of their total assets in real estate, and must derive at least 75% of its gross income from properties. That might sound obvious, but keep in mind that some REITs don’t own any physical property at all and are simply involved in mortgage paper. Even REITs that deal in physical real estate differ widely from one another. Some lease pretty common properties such as apartments, strip malls, or hotels. Others lease driving ranges or telecom towers instead of more conventional commercial real estate.
In other words: The universe of real estate investment trusts is quite varied, even if property is at the foundation of all REIT business models.
The last two words, “investment trust,” are also important in defining how these companies treat their investors. There are certain thresholds that set REITs apart from conventional publicly traded company stocks, including a mandate that they have no more than 50% ownership resting in the hands of five or fewer investors.
But perhaps the most important rule you need to know about real estate investment trusts is that they must pay at least 90% of taxable income to shareholders in the form of dividends each year. This demand for consistent income is a big reason many investors are drawn to REITs, particularly as a way to boost their retirement savings through regular dividends.
2 Types of REITs to Know
The REIT universe is sometimes divided into two distinct flavors: equity REITs and mortgage REITs. And right now, amid a volatile interest rate environment, the distinction is pretty important to acknowledge.
1. Equity REITs
If you’ve been investing for a while you’ve probably come across the word “equity” before. The term is shorthand for a direct ownership stake—and some investors even use the term “equities” to refer to the stock market as a whole, as shares of publicly traded companies are in fact equity stakes in individual businesses.
Equity REITs, then, are directly invested in real estate assets. They own or manage properties ranging from office buildings to shopping centers to apartment complexes, leasing that space and generating income from the rents. And publicly traded equity REITs allow you to enjoy in that exposure through their shares, which you can purchase through any traditional brokerage account.
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2. Mortgage REITs
Mortgage REITs, on the other hand, don’t traffic in real estate properties—instead, they deal with debt. They finance real estate, operating less like a traditional REIT and more like a financial firm. This is done by either originating mortgages, or buying and selling those mortgages and related mortgage-backed securities. It also commonly involves borrowing heavily to then trade all that mortgage paper at scale. Their profits, then, tend to revolve around net interest income (NII): the difference between the interest revenue they generate and the financing costs on all their assets.
This fundamentally makes mortgage REITs riskier than equity REITs. After all, the 2008 financial crisis was caused in large part by financial firms borrowing heavily to invest in the debts of third parties. Particularly in the current interest rate environment, where borrowing is getting steadily more expensive all around, that’s a tough spot to be in.
That said, many mortgage REITs offer twice or even thrice the income potential of equity REITs. These dividends might be at risk of evaporating if things go south, but if they hold up, investors will be richly rewarded for looking beyond the conventional players on Wall Street.
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The REITs With Top Performance Potential for an Investor’s Portfolio
You already might be wondering how to decide between mortgage REITs or equity REITs, or whether you should invest in a small commercial real estate firm or a big industrial park operator. After all, there’s a great big world of real estate investing out there!
The answer is: There is no one right answer for everyone. With so many things on Wall Street, your unique risk tolerance and retirement planning needs are critical to deciding the best REITs for your portfolio.
The following list should get you pointed in the right direction, however. All seven of these leading real estate investment trusts offer significant income and the potential for long-term upside if things pan out in 2024 and beyond.
Related: How to Invest in Private Real Estate With Private Equity Funds
1. Realty Income
— Market capitalization: $54.4 billion
— Dividend yield: 5.0%
— REIT industry: Commercial real estate
The aptly named Realty Income (O) is a real estate investment trust that generates regular income for its shareholders by leasing free-standing, single-tenant commercial properties. Think of your local drug store or big-box retailer as examples. In fact, CVS Health (CVS) and Walmart (WMT) are both key tenants in the Realty Income portfolio.
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The reliable nature of long-term leases to big clients like these is part of the reason Realty Income is such a dependable REIT. In fact, its operations are so reliable that it pays dividends once per month instead of once per quarter. The company just distributed its 650th consecutive payday in August, proving the long-term dividend potential this top REIT stock has to offer.
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The company recently agreed to acquire competitor Spirit Realty in a $9.3 billion deal, which further consolidates its power. That the deal was an all-stock transaction without big borrowing costs also shows that Realty Income’s management knows how to protect shareholder value as it focuses on growth and efficiency.
2. Prologis
— Market capitalization: $117.5 billion
— Dividend yield: 3.0%
— REIT industry: Industrial real estate
Prologis (PLD) is the leading REIT across all of Wall Street, with the largest market cap of any of these specialty stocks. And despite the fact that most investors probably think of shopping centers or apartment buildings when they think of real estate, PLD is actually an industrial REIT that specializes in warehouses and logistics centers.
In the age of e-commerce and a “just in time” global economy, this has been a decidedly good business to be in. Over the past 10 years, shares have jumped roughly 200% to outperform the broader S&P 500 in the same period.
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What’s more, its top tenants include the likes of Amazon.com (AMZN) and Walmart (WMT). These big-time partners coupled with long-term leases means PLD has locked in a heck of a lot of reliability for the foreseeable future. Pair this model with a massive scale that totals 1.2 billion square feet across four continents, and it seems all but a sure thing that this leading REIT will remain at the top of its class in 2024 and beyond.
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3. Ellington Financial
— Market capitalization: $1.1 billion
— Dividend yield: 12.0%
— REIT industry: Mortgage
Ellington Financial (EFC) is a mortgage-related real estate investment trust. As previously mentioned, that means elevated risk for several reasons.
First, the fundamentals of trading mortgage paper instead of operating physical properties come with unique risks. Secondly, a high-interest-rate environment could pinch EFC as its borrowing costs rise (though that might start to change with the Federal Reserve’s September FOMC meeting). And lastly, EFC is also the smallest stock on this list—meaning that unlike multibillion-dollar REITs, it simply doesn’t have the same resources to weather any widespread downturns in the economy.
That said, Ellington is a little bigger than it once was. In mid-December, it completed its merger with fellow mortgage REIT Arlington Asset Investment Corp., which deals in mortgage servicing rights, agency mortgage-backed securities, and credit. The company’s name remains Ellington Financial and the stock still trades as EFC.
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EFC also pays monthly dividends that are incredibly generous, and hard to match by any stock in any sector on Wall Street. And while many of EFC’s peers have been very volatile lately, Ellington has been roughly flat over the past year thanks to strong operations and effective interest-rate hedging to protect its bottom line.
If you’re really after income and don’t mind a bit more risk in pursuit of bigger yield, EFC is worth a look.
Related: 5 Best Vanguard Dividend Funds [Low-Cost Income]
4. American Tower
— Market capitalization: $109.0 billion
— Dividend yield: 2.8%
— REIT industry: Telecom real estate
American Tower (AMT) is one of the largest global REITs of any flavor, and its speciality is owning and operating multitenant communications real estate. This includes telecom towers that it rents to wireless providers, fiber optic networks, data centers, and other important infrastructure components that power our digital lives.
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With a portfolio of about 225,000 different properties and massive demand for telecommunications from both businesses and consumers alike regardless of the macroeconomic picture, AMT offers incredible reliability. But as the demand for data continues to grow, this REIT investment is getting even bigger, too.
Because AMT is structured as a real estate investment trust that must deliver 90% of taxable income back to shareholders, that means a mandate for steady dividend growth as the company thrives in a digital age. As proof, the company’s generous $1.62 quarterly dividend has surged from just 21 cents per quarter back in 2012—an almost seven-fold increase in just 11 years.
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5. Equinix
— Market capitalization: $77.9 billion
— Dividend yield: 2.1%
— REIT industry: Datacenter real estate
Equinix (EQIX) is an attractive REIT for investors looking for a play on cloud computing and the “big data” revolution of the 21st century. Specifically, EQIX is the largest global data center and colocation provider for enterprise networks.
In other words, Equinix is responsible for the actual server rooms that house all the bits and bytes that power all the content and software we offload to “the cloud” without really considering where the cloud is.
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Considering the fact that cloud-based software is now just the normal way of doing business, that creates a massive opportunity for Equinix as one of the largest specialized firms in the space. This digital infrastructure provider boasts almost half a million connections to more than 10,000 customers, and it delivered almost $8.2 billion in total revenue for fiscal 2023. That’s up more than 12% from last year, and up almost 90% since 2017 thanks to continued success.
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6. Welltower
— Market capitalization: $75.4 billion
— Dividend yield: 2.2%
— REIT industry: Healthcare facilities
Welltower (WELL) is a real estate investment trust that is focused on health care properties, including seniors housing operators, rehabilitation facilities, and related health systems across the United States, Canada, and the U.K.
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In the big picture, healthcare—and related real estate stocks like Welltower—is among the most reliable businesses out there. After all, one of the few certainties in life is that we’re all going to get older and need more care over time.
Welltower is one of the five largest U.S. REITs of any flavor, and it’s one of the best performing REIT stocks of 2023, up more than 30% thanks to strong occupancy levels even as it continues to grow its operations. Specifically, WELL reported in November the closure of $6 billion worth of acquisitions so far this year as it tightens its grip on the healthcare real estate market.
That combination of current scale plus continued growth makes Welltower one of the top REITs for 2024.
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7. Public Storage
— Market capitalization: $60.1 billion
— Dividend yield: 3.5%
— REIT industry: Storage facilities
Even if you don’t recognize the Public Storage (PSA) brand, hopefully you can guess what this REIT stock does. It operates more than 3,000 self-storage facilities across 40 states, with about 217 million rentable square feet. It also has a stake in European self-storage brand Shurgard that has almost 300 locations across the Atlantic.
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For better or worse, people simply have too much stuff these days and nowhere to put it. That makes storage units an in-demand commodity, as well as a business that offers reliable income from the monthly rent checks sent in by tenants.
Public Storage admittedly doesn’t offer impressive growth potential, but it is projected to steadily expand its top line by mid-single digits in both fiscal 2023 and 2024. More importantly for income-oriented REIT investors, it pays $3.00 per share each quarter—more than double the $1.40 per share it was paying as recently as 2015. That dividend growth is a sign of strong management and a concrete commitment to sharing the wealth with stockholders of this storage real estate leader.
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Can You Buy REITs in Funds?
Buying individual REITs like the ones above can be an effective way to tap into the real estate market using publicly traded stocks. But there are also REIT mutual funds and exchange-traded funds (ETFs) out there that provide diversified ways to invest across the sector in one simple holding.
For instance, the Vanguard Real Estate ETF (VNQ) has more than $34 billion in total assets under management, and gives you exposure to 160 different top REITs. Furthermore, the VNQ fund passes through the dividends of its holdings to provide an annualized yield of 3.8%.
REIT ETFs carry their own unique risks, but they can be another effective way to gain exposure to real estate investments in your portfolio and provide consistent retirement income.
Related: The 24 Best ETFs to Buy for a Prosperous 2024
How Else Can You Buy Real Estate?
Typically, if you want to own stock in a real estate company, you have to invest through the public markets. But equity crowdfunding makes it possible for everyday investors to secure a stake in privately held real estate businesses.
Related: 9 Best Real Estate Crowdfunding Sites + Platforms
Equity crowdfunding platforms typically allow for small investments (read just hundreds or even tens of dollars) in a wide range of businesses. The platform is usually paid through either a monthly fee or by collecting a percentage of the funds raised for the business. And generally speaking, these platforms provide high ease of use compared to many other types of real estate investments.
Equity crowdfunding pick: EquityMultiple
— Available: Sign up here
Some real estate crowdfunding platforms only allow you to invest in property portfolios. However, some platforms, such as EquityMultiple, also allow you to invest in individual properties—in this case, commercial real estate (CRE).
EquityMultiple carries a minimum $5,000 initial investment and is limited to accredited investors. However, those investors have access to individual commercial real estate deals, funds, and even diversified short-term notes.
For those interested in learning more about EquityMultiple, consider signing up for an account and going through their qualification process.
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The natural question, then, is “Which services are worth a shot?” We explore some of the best (and best-known) stock recommendation services.
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As even novice investors probably know, funds—whether they’re mutual funds or exchange-traded funds (ETFs)—are the simplest and easiest ways to invest in the stock market. But the best long-term stocks also offer many investors a way to stay “invested” intellectually—by following companies they believe in. They also provide investors with the potential for outperformance.
So if your’e looking for a starting point for your own portfolio, look no further. Check out our list of the best long-term stocks for buy-and-hold investors.
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Looking to simplify your retirement investing? Target-date funds are a great way to pick one fund that aligns with when you plan to retire and then contribute to it for life. These are some of the best funds to own for retirement if you don’t want to make any investment decisions on a regular basis.
We provide an overview of how these funds work, who they’re best for, and then compare the offerings of three leading fund providers: Vanguard, Schwab, and Fidelity.
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The vast majority of American dividend stocks pay regular, reliable payouts—and they do so at a more frequent clip (quarterly) than dividend stocks in most other countries (typically every six months or year).
Still, if you’ve ever thought to yourself, “it’d sure be nice to collect these dividends more often,” you don’t have to look far. While they’re not terribly common, American exchanges boast dozens of monthly dividend stocks.
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