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REITs: quenching the thirst for income

By: Catherine Yoshimoto, Sr. Index Product Manager

Persistently low interest rates have affected traditional sources of income such as bond coupons. Income-thirsty market participants may feel like they are waiting for a rain drop in a drought. Real estate has traditionally been viewed as an income generating investment, yet a direct investment in a commercial real estate property can be expensive, illiquid and fraught with inconsistent yields. Listed equity real estate investment trusts (REITs), however, provide a tradable liquid alternative to direct real estate investing.

REITs provide a way for individuals to earn a share of the income deriving from the ownership of commercial real estate. The shareholders of a REIT earn a share of the income produced through real estate investment, without actually having to go out and buy or finance property. Under US law, among several requirements to qualify as a REIT, a company must pay 90% of its taxable income to shareholders in the form of dividends each year. As a result, US REITs have tended to be among the sectors of the equity market offering higher-than-average yield.

In 2006, FTSE partnered with the National Association of Real Estate Investment Trusts (NAREIT) to launch the FTSE NAREIT US Real Estate Index Series. This six-index series represents the US stock exchange-listed REIT industry, and equity REITs comprise 95% in market cap of the investable opportunity set. The FTSE NAREIT Equity REITs Index (ticker: FNRE) covers 83% of the investable US REIT market and includes all equity REITs in the index universe with the exception of those focused on timberland and infrastructure.

An equity REIT generates income through owning and operating real estate properties. Given the requirement by US law for REITs to pay out 90% of their income as dividends, the chart below should come as no surprise. The dividend yield of the FTSE NAREIT Equity REITs Index has consistently exceeded that of the Russell 3000® Index over the last 5 years. But dividend yield is only one portion of total return—we must also consider price (capital) appreciation. 


On a total return basis, including both price and income return, we can see below that the FTSE NAREIT Equity REIT Index has also consistently outperformed the all-cap US Russell 3000 Index over the last 20 years. Over this period, dividends contributed nearly two-thirds of the total return for the FTSE NAREIT Equity REIT Index.

As traditional sources of income like bond coupons have all but dried up, market participants may find it interesting to follow the performance of the FTSE NAREIT Equity REITs equity index. Perhaps the relatively high dividend yield may, after all, provide some raindrops in the drought.

For more information, see the FTSE NAREIT US Real Estate Index Series. For additional  research on this topic, please see the FTSE Russell Insights paper, Understanding the benefits of REITs in the US market.



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