Investing in dividend stocks is a great way to build wealth over the long term. However, income investors often face a tough choice: Should they invest in real estate investment trusts (REITs), which often offer high yields but less capital appreciation, or traditional dividend stocks, which pay lower yields but have more growth potential?
What are REITs?
REITs operate a simple business model. They purchase properties, rent them out, and split the rental income with their investors. They are required to pay out at least 90% of their taxable income as dividends to their investors.
Most REITs fall into either one of two categories: gross lease and net lease. The gross lease REITs offer all-inclusive rental agreements, in which the landlord pays most of the operating expenses (taxes, insurance, and utilities) associated with the property. Net lease REITs charge lower rent but don’t cover the operating expenses.
Image source: Getty Images.
There are currently 13 categories of REITs: office, retail, industrial, residential, hotels and resorts, healthcare facilities, data centers, self-storage, timber, infrastructure, mortgage, specialty, and diversified REITs.
Some of these sectors are more resilient in economic downturns than others, while others — like data center REITs — can benefit from the secular growth of other markets. So when investors pick a REIT, they need to carefully assess the financial health of its core tenants and see if it’s maintained high occupancy rates over the past few decades.
For example, Realty Income (NYSE: O) — one of the best-known net lease REITs in the country — has kept its occupancy rate comfortably above 96% over the past three decades. It has also paid out consecutive monthly dividends ever since its founding in 1969 and has raised its dividend 124 times since its public debut in 1994.
What are traditional dividend stocks?
Companies that aren’t REITs don’t need to pay out most of their profits as dividends. Instead, they can choose to pay out a percentage of their profits or free cash flow (FCF) as dividends.
But they generally won’t do that unless their business is maturing. That’s because growing companies will usually reinvest their profits and FCF into expanding instead of simply giving that cash back to their investors.
That’s why you’ll find many of the highest-yielding dividend stocks in the slower-growth sectors like consumer staples, banking, energy, utility, and pharmaceuticals. However, it can be challenging for even the best companies to raise their dividends every year through economic downturns. So to find the most resilient companies, investors should take a closer look at Dividend Kings, which have raised their payouts annually for at least 50 years.
Many companies will also repurchase their own shares — which increases the value of their remaining shares — instead of paying dividends. By comparison, REITs usually dilute their own shares to raise more cash and buy more properties.
The best dividend-paying companies will consistently grow their revenue and profits, buy back their own shares, and increase their annual dividends. A reliable income play that checks all of those boxes is Procter & Gamble(NYSE: PG), the consumer staples giant that has raised its dividend annually for 67 straight years.
Are REITs or dividend stocks better investments?
Over the long term, a basket of top dividend stocks can outperform a basket of REITs for three simple reasons: REITs dilute their own shares to raise more cash, they’re designed to generate steady income instead of capital appreciation, and they’re more sensitive to interest rates than more diversified companies. The top dividend-paying companies will consistently grow their earnings per share to support their payouts, and that cycle should drive their shares higher.
To see that difference, let’s compare the 10-year total returns of the Schwab U.S. REIT ETF(NYSEMKT: SCHH), which owns more than 100 of the top REITs in America, and the Vanguard High Dividend Yield ETF(NYSEMKT: VYM), which holds over 500 of the market’s top dividend-paying stocks.
So for many younger investors, it might make more sense to invest in a basket of lower-yielding dividend growth stocks than higher-yielding REITs. But for older investors who are looking for passive income and don’t plan to reinvest their dividends, REITs might offer higher yields than fixed-income investments like CDs and bonds.
Therefore, the choice between REITs and other dividend stocks depends on your own risk tolerance and investment horizon. I personally have a mix of REITs, dividend stocks, and CDs in my own income-generating portfolio, and I think investors should simply understand the differences instead of fixating on one as the best choice.
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TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
