REITs -- real estate investment trusts -- offer investors high current income and potential for capital appreciation. Although REIT dividends can at times be higher than bond interest, neither investment is inherently better or worse – each comes with its advantages and risks; both may have a place in your portfolio.
Bonds are debt instruments: when you buy a bond you become a lender. REITs are companies that invest in real estate: when you buy a REIT stock you become a shareholder in the business. Lenders and shareholders derive income from different sources and have different rights, which comes with different advantages and risks.
At maturity, a bond is repaid in full; REIT shares have no maturity. If you hold a bond to maturity you will get back the entire principal, but you get back from an REIT whatever you can sell your shares for.
Bonds pay a fixed amount of interest semiannually; the interest is fixed for the life of the bond. REITs pay quarterly dividends that are not fixed or guaranteed: a REIT can increase or decrease its dividend and even suspend or eliminate it at any time.
Bonds are classified by the type of issuer -- for example, government, corporate, municipal, foreign, mortgage; maturity -- short, medium, long; and quality -- high, medium, low. It is relatively easy to select the right bonds for your portfolio based on your needs and goals, because bonds from the same category tend to act similarly. REITs are classified by the type of real estate they invest in -- commercial, residential, retail, industrial, medical -- but REITs' performance depends on how they are run.
Most bonds are available in $1,000 denominations. REIT share prices can vary from just a few dollars to over a hundred, but regardless of the price, you can buy any number of shares you want.
A bond’s price can rise above its face value – the amount to be repaid at maturity – and if you sell it then, you will book a capital gain, but if you hold a bond to maturity you will get back only its face value. There is no limit as to how high the price of a REIT’s shares can go, and shares of REITs that increase dividends over time are more likely to appreciate the most.
Based in San Diego, Slav Fedorov started writing for online publications in 2007, specializing in stock trading. He has worked in financial services for more than 20 years, serving as a banker, financial planner and stockbroker. Now working as a professional trader, Fedorov is also the founder of a stock-picking company.