S&P 500 REITs: A Guide to High-Yield Investments and Volatility

The S&P 500 REITs offer a unique opportunity for investors to earn high yields. The average dividend yield for S&P 500 REITs is around 4%, significantly higher than the broader S&P 500 index.

High-yield investments like S&P 500 REITs can be attractive to income-seeking investors, but they often come with higher volatility. REITs are required to distribute at least 90% of their taxable income to shareholders, which can lead to fluctuations in stock prices.

Investors should be aware that the S&P 500 REITs index is heavily weighted towards large-cap stocks, with the top 10 REITs accounting for over 40% of the index's market capitalization. This concentration can increase the risk of a significant decline in the index's value if one of these large-cap stocks experiences a downturn.

REITs can be a great way to invest in real estate without the direct ownership responsibilities. They offer passive investment vehicles for income-generating real estate assets.

Some investors consider REITs "safer" investments than stocks due to their high dividend yields and relatively lower volatility. But they can still fall in value quickly, so it's essential to be cautious.

There are two main types of real estate investment trusts: equity REITs and mortgage REITs. Equity REITs invest in income-producing real estate and earn income through rents, while mortgage REITs lend money to real estate owners and operators or purchase mortgages.

Here are the average annual total returns for different REIT subgroups from 1994 to 2021:

The long-term annual average return of the stock market has been 10%, but year-to-year returns can vary significantly.

REITs can be less volatile than the stock market, but they can still fall quickly, so buyer beware. The average annual total return for REITs varies by subgroup, ranging from 9.3% for diversified and lodging/resorts to 18.8% for self-storage.

The correlation between REITs and the stock market is a concern, with a correlation of 0.59 being considered too high by some investors. This means that REITs tend to move in tandem with the stock market, which may not provide the diversification benefits that investors are looking for.

To mitigate this risk, consider investing in non-traditional assets, such as real estate and crowdfunded real estate investments, which have had higher returns than traditional asset classes over the last few decades.

Volatility is a key consideration when investing in REITs. REIT stocks are typically volatile due to market risk, which can cause mass selloffs or price run-ups in response to events like recessions, changes in interest rates, natural disasters, and political events.

The good news is that the volatility of most real estate REIT stocks is lower than the volatility of stocks on the S&P 500. In fact, some REITs are only half as volatile as the market at large. This is because REITs tend to focus on income-producing properties like office buildings, apartments, and shopping malls, which are less sensitive to market fluctuations than stocks.

REIT companies also tend to have a naturally diversified portfolio, which helps to reduce volatility. This diversification can provide a smoother ride for investors, but it's essential to remember that REITs can still fall just as fast as stocks.

Here's a rough idea of the average annual total return for different types of REITs compared to the S&P 500 from 1994 to 2021:

As you can see, some REIT subgroups have performed significantly better than the S&P 500 over the long term. However, it's essential to remember that year-to-year returns can vary significantly, and REITs can be just as volatile as stocks if you're not careful.

Rising interest rates can lead to a decline in REIT stocks, as higher rates decrease the value of existing fixed-rate mortgages held by REITs.

Higher interest rates also reduce the value of future cash flows from mortgage-backed securities, making REITs less attractive investments for investors.

A rise in interest rates may decrease the price of REITs, even if dividends increase. This is because the value of existing fixed-rate mortgages and future cash flows from mortgage-backed securities decreases.

Publicly-traded REITs are driven by the same macroeconomic forces that affect the stock market, including interest rates and economic growth.

REITs have historically performed better than many asset classes, with a 25-year return of 9.05% and a 30-year return of 10.44%. Over a 25-year period, the S&P 500 returned 7.97%, slightly lower than REITs.

The total average annualized return from U.S. REITs between 1972-2023 was 10.28%, with 7.33% coming from dividends and 2.95% from share price growth. This makes sense, as the SEC requires REITs to pay 90% of their annual profits back to shareholders in the form of dividends.

There is a correlation between the stock market and publicly traded REITs, with a correlation of 0.59 between REITs and the total U.S. stock market over two decades. This means that REITs don't actually offer much diversification benefit, as a stock market crash is likely to tank your REIT stocks too.

Here's a rough breakdown of the correlation between REITs and other asset classes:

This correlation is worth considering if you're thinking of adding REITs to your portfolio to diversify it.

REITs have historically performed better than many asset classes, with the FTSE NAREIT All Equity REITs Index returning 9.05% over a 25-year period.

Over a 30-year period, this index returned 10.44%, and the total average annualized return from U.S. REITs between 1972-2023 was 10.28%.

A significant portion of REIT returns comes from dividends, with 7.33% of the average return coming from dividends.

The remaining 2.95% comes from share price growth, which is a notable aspect of REIT performance.

Over the last 25 years, the S&P 500 has returned a respectable 7.97%, but it's worth noting that REITs have historically performed better.

REITs have outperformed the S&P 500 over the long term, with a 25-year return of 9.05% and a 30-year return of 10.44%. This is a significant difference, especially considering the bulk of REIT returns come from dividends.

The total average annualized return from U.S. REITs between 1972-2023 is 10.28%, with 7.33% coming from dividends and 2.95% from share price growth. This dividend-driven return is a key characteristic of REITs.

Stocks, on the other hand, have historically been a sound investment, with the S&P 500 returning 9.86% over a 30-year period. This is a testament to the enduring power of the stock market.

REITs and stocks do correlate, with a correlation of 0.59 between REITs and the total U.S. stock market over two decades. This means that REITs don't offer much diversification benefit, and a stock market crash is likely to impact REIT stocks as well.