REITs versus bonds as yield investments

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Investors looking for the highest but safest yields may compare real estate investment trusts (REITs) to bonds. This is especially true for retirees who want to get the most out of their retirement fund. They want the highest possible returns, but they don’t want to risk their principal.

In order to compare REITs to bonds, let’s look at the distribution of these two types of assets:

REITs

  • Equity investment in a large portfolio of properties or mortgages
  • Dividends are paid quarterly and some are monthly
  • Dividends may increase
  • No specific due date
  • The value can grow
  • The value depends on the performance of the properties in the portfolio
  • Stocks can be purchased through a broker, in shares of an exchange-traded fund (ETF), or in a mutual fund. REITs can also be traded privately

Obligations

  • Debt security issued by companies and government entities with a promise to repay principal plus interest within a set period of time
  • Interest is paid every six months
  • Fixed interest
  • Set due date
  • Maturity at face value (usually $1,000)
  • The value depends on the financial strength of the issuer
  • Bonds can be purchased through a broker (usually in $1,000 increments), in shares of an ETF, or in a bond mutual fund. US treasury bills, notes

Compare a REIT and a bond

Here is an example of a comparison between a corporate bond and a REIT:

  • An investor can buy an S&P A-rated Cigna bond from an online broker that matures on March 15, 2031, at $1,000. It is a callable bond yielding 2.375%. It can be purchased for $843.93, giving it a yield to maturity of 4.615%.
  • Now compare this Cigna corporate bond with the Arbor Real Estate Trust Inc. REITs. The closing price per share on September 9, 2022 was $15.12. There is no expiration date and it pays 10.69%.
  • Related: This Little-Known REIT Has Produced Double-Digit Annual Returns Over the Past Five Years

If you were an investor looking for the best income investment for your retirement funds, which would you choose between these two investments – corporate bond or REIT?

Taxation of REIT Dividends and Bond Interest

While there are a number of differences between REITs and bonds, there are also similarities. REITs and bonds are sensitive to changes in interest rates by the Federal Reserve. Dividends from REITs and interest from corporate bonds are also taxed as ordinary income. However, the National Association of Real Estate Investment Trusts (NAREIT) reports that dividends from REITs can actually be divided into three categories for tax purposes: ordinary income, capital gains and return of capital.

It should be noted that interest from US Treasury bills, notes, and bonds is subject to federal income tax, but not state income tax. Many municipal bonds (issued by US municipalities) are exempt from federal income tax and some are exempt from both federal and state income tax. Some people invest their retirement funds in US Treasury bonds because of their security. Usually, munis — a nickname for tax-exempt municipal bonds — aren’t used in retirement accounts.

So REITs or bonds? What do you prefer?

Highlights of Today’s Private Markets News

  • The private debt investment platform Percent launches a new corporate debt offering for taigre, a VC-backed international software company, with an APY of 15-17%. The platform’s recent H1 update shows an average historical yield of 12.38%.
  • The CalTier Multi-Family Portfolio Fund recently made a new investment in a portfolio of four multi-family properties comprising 185 units. The CalTier Multi-Family Portfolio Fund is one of the few non-traded real estate funds available to non-accredited investors and has a minimum investment of $500. Year-to-date, the fund has produced an annualized cash-on-cash return of 7.02%.

Find more news and alternative investment offers on Benzinga Alternative Investments

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