There are a lot of benefits to owning real estate. Steady cash flow might be number one on the list, although the ability to counter inflation by raising the rent could be moving up fast on many a real estate investor's list.
Because real estate often moves independently of the stock market, that huge sector can also add diversity to a portfolio and tamp down some risk. For a lot of people, buying and managing income-producing real estate is impractical and even unrealistic.
But anyone who buys stocks can buy real estate investment trusts (REITs), which are portfolios of income-producing properties that carry with them the legal obligation of paying at least 90% of their taxable income to shareholders in the form of dividends.
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Not as hot but not as cold, and income along the way
There are about 225 publicly traded REITs across multiple industry sectors, and the best ones all have growing records -- some going back decades -- of dividend and share price growth.
The stolid nature of real estate investing makes a sharp contrast to investing in tech stocks. REITs aren't typically going to see the soaring heights or plunging lows that can characterize the tech sector from its smallest players to its most massive.
Let's use a couple of indexes as proxies for comparison here: the Vanguard Real Estate Index Fund ETF (VNQ 1.31%) and the NASDAQ-100 Technology Sector Index. The former is an exchange-traded fund comprising a weighted group of about 160 REITs, while the latter is an index that currently contains 42 tech stocks.
A couple of charts here tell an interesting story. First, here's a look at the year-to-date performance of each of these indexes.
Now, let's look back a decade. This was a great time for the top tech stocks, and the performance edge clearly goes to NDXT. But look at how steady the REIT index has been and how much the dividend payouts affect the total return for each of these indexes. For tech stocks, not so much. For REITs, a lot, nearly doubling VNQ's performance when just considering share price.
I'm sticking with REITs over tech
Right now, my portfolio includes 13 REITs and that VNQ ETF. I'm confident in seeing an average yield of about 4%, and some quick ciphering would show that someone doing the same with a $100,000 pot of REITs could expect a monthly income of about $330 from that particular baker's dozen.
Everyone's situation is different, of course, but for even the most go-go growth tech stock buyer or -- at the other end of the spectrum, the completely risk-averse income investor -- now might be a good time to consider some boring old real estate stocks instead of exiting the market completely and giving up the income that well-picked REITs just keep on providing.
Full disclosure: My single largest holding is Alphabet (GOOG 1.31%), and I'm certainly not advocating putting everything in REITs. But a substantial amount of my portfolio is, and I plan to keep it that way during my ongoing transition into drawing Social Security and enjoying Medicare. They combine the benefits of owning real estate and dividend-paying equities in a way that I find sustainable and even reassuring as we plow through these bearish times.
