Real Estate Investment Trusts, or REITs, are becoming a more popular investment these days for people looking for an alternate source of dividend income. In order to qualify as an REIT, a company must pay out at least 90% of its taxable income to investors. This prevents the trusts from having to pay corporate income tax. This allows investors to invest in these funds as though they themselves owned the property.

It is a great way for people to invest in Real Estate without actually owning a few properties themselves. In Canada, RioCan is one of the largest Real Estate Investment Trusts around. One of the strip malls in your area is probably owned by them. There are three main types of REITs:

1. Equity REITs: These companies purchase properties such as houses, apartment complexes and commercial buildings and lease them to companies in order to generate a cash flow. This is what most people think of when told about Real Estate Investment Trusts. They function much in the same way as individual Real Estate investors, but on a much larger scale.
2.  Mortgage REITs: This form of Real Estate Investment Trusts invest in mortgage securities. These companies invest in long term bonds by using short term funds, and make money from the differences in yields. These companies make a lot of money when times are good, but as soon as that yield curve flattens, or decreases, they lose money. These are much riskier investments, and not a good option in today’s market.
3. Hybrid REITs: As the name suggests, these are Real Estate Investment Trusts which hold a combination of Mortgage and Equity REIT investments.

Real Estate Investment Trusts generally make for a good investment, as does Real Estate in general. Dividend income is relatively stable (as would rent be if you owned an individual investment property). If you’re looking to a good alternative for dividends from a different source than stocks, I would suggest looking into a well-managed Real Estate Investment Trust.  However, I would stay away from Mortgage REITs for the time being, until the yeild curve increases favourably and the market in the United States stabilizes. Invest only in Equity REITs for the time being, unless you have a very high tolerance for risk.

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