Roughly 168 million Americans hold REITs directly or indirectly through their pension funds, 401(k)s, and brokerage accounts. US equity REITs paid out $66.2 billion in dividends in 2024 alone. Yet most people who own them cannot explain what a REIT actually is beyond something vague about real estate. That gap matters, because REITs behave differently from both stocks and direct property ownership in ways that change how you should think about them, when they are worth buying, and when they are not the right fit for a portfolio.
A REIT, or Real Estate Investment Trust, is a company that owns, operates, or finances income-producing real estate. By law, REITs must distribute at least 90% of their taxable income to shareholders as dividends each year. In exchange, they pay no corporate income tax at the entity level. That tax structure is what makes REIT dividend yields consistently higher than those of most other equities.
In this guide, we break down how REITs work, what the different types are, what the real return history looks like, and where they fit in a sensible investment strategy.
What Are REITs: Dividend Yields by Sector (Dec 2025)
Average dividend yields across major REIT categories, per Nareit data.
12.2%
3.97%
3.79%
1.24%
How REITs Actually Work
The mechanics of a REIT are straightforward once you strip away the jargon. A REIT pools capital from investors, uses that money to buy or finance real estate, collects income from rents or mortgage payments, and distributes most of that income back to shareholders. You buy shares in the REIT through a standard brokerage account, the same way you would buy shares in Apple or Unilever.
What makes REITs different from buying shares in a regular company that happens to own property is the 90% distribution requirement. A REIT is legally required to pay the majority out as dividends, which is why REIT dividend yields are structurally higher than typical equity yields.
According to Nareit’s industry financial snapshot, US equity REITs posted a one-year average dividend yield of 3.97% as of December 2025, more than three times the S&P 500’s 1.24% yield.
Equity REITs own and operate properties directly. They buy buildings, lease the space, and distribute rent income. Think apartment blocks, warehouses, shopping centres, hospitals, data centres, and cell towers.
Mortgage REITs finance real estate through mortgages. They lend money to property owners or buy mortgage-backed securities. The yields are much higher, averaging 12.2% as of December 2025, but the risk profile is entirely different from equity REITs.
Most retail investors who want REIT exposure should focus on equity REITs. Mortgage REITs are sensitive to interest rate movements in ways that can produce rapid dividend cuts when rates shift unexpectedly.
The Different Property Sectors: Not All REITs Are the Same
Equity REITs are not a monolith. The performance gap between sectors in any given year can be enormous. In 2024: regional mall REITs returned 27.4%, data centre REITs returned 25.2%, while industrial REITs fell 17.8% and lodging REITs dropped 2.0%. All equity REITs. Same legal structure. Completely different outcomes.
- Residential (apartments, single-family rental) tends to hold up well when home purchase costs are high. Apartment REITs posted a 3.79% dividend yield as of December 2025.
- Industrial and logistics includes warehouses feeding e-commerce fulfilment. Prologis raised its dividend at an 11% compound annual rate over the past decade.
- Data centres represent one of the fastest-growing REIT sectors, driven by cloud computing and AI infrastructure demand.
- Healthcare REITs cover hospitals, senior housing, and medical office buildings. Tends to be more defensive than cyclical sectors.
- Retail (net lease) works through net lease REITs like Realty Income own properties leased to single tenants under long-term agreements. Realty Income has paid a monthly dividend for over 54 consecutive years.
- Office remains the most troubled REIT sector post-pandemic. Office REITs traded at a 44.1% discount to estimated net asset value in mid-2023.
- Specialty (cell towers, self-storage) includes American Tower and Crown Castle own the physical towers on which wireless networks run, providing defensive assets with predictable cash flows.
The sector you buy matters as much as the REIT structure itself. A diversified REIT index fund lets you own the broad market without needing to call individual sector bets.
The Real Return History: Honest Numbers
The FTSE Nareit All Equity REITs Index delivered a total return of 39.88% in 2021, fell 25.10% in 2022, recovered 11.48% in 2023, and returned 8.8% in 2024. The Index posted 11.70% one-year total return as of May 2025. The public REIT market cap grew at 17.6% annually from 1990 to 2021.
The 2022 decline was driven by the fastest interest rate hiking cycle in four decades, not a REIT-specific problem. REITs, as yield-generating assets, reprice when risk-free rates move sharply.
Over multi-year periods, REITs provide real diversification benefit. Studies consistently suggest an optimal REIT allocation of 5 to 15% of a portfolio, and 64% of the top 25 largest global institutional investors already use REITs for this reason. If you are building your broader investment foundation, our guide on how to invest £1,000 covers where REITs fit alongside other asset classes.
The Tax Issue: What You Actually Take Home
FFO, or Funds From Operations, is the standard REIT earnings metric. It adds depreciation back into earnings because depreciation reduces accounting profit significantly in real estate but does not represent actual cash leaving the business. FFO is a better proxy for dividend sustainability than reported net income.
On tax: 78% of annual REIT dividends qualify as ordinary taxable income. Ordinary REIT dividends are taxed at your income tax rate, not the lower qualified dividend rate that applies to most stock dividends. The solution is to hold REITs inside a tax-sheltered account such as a Stocks and Shares ISA in the UK, or a Roth IRA or traditional IRA in the US.
When REITs Make Sense in a Portfolio
The clearest use case is income generation. The 3.97% average equity REIT yield comes from a diversified base of real assets with legally mandated distribution requirements. Federal Realty has increased its quarterly dividend every single year for 57 consecutive years.
REITs are also a practical way to get real estate exposure without the capital requirements, concentration risk, and management burden of direct property ownership. According to the SEC’s investor guidance on REITs, they must meet strict asset, income, and distribution tests to maintain their tax-advantaged status, providing structural investor protections.
Where REITs are less well-suited: short investment horizons (can fall 25% in a rate shock year), taxable accounts in high income tax brackets, and investors seeking capital growth over income.
How to Actually Buy REITs in 2026
Individual REIT stocks give you maximum control but concentrate your exposure. A REIT index ETF like Vanguard Real Estate ETF (VNQ) at 0.12% annual expense ratio gives you broad exposure to hundreds of REITs at very low cost. This is the right starting point for most investors. Pair this with a sensible overall budget, and our guide on the 50/30/20 budget rule explains how to carve out room in your finances for investing consistently.
Many global equity index funds also already include REIT exposure as part of their real estate sector allocation. If you own a total market index fund, you probably already have some REIT exposure without realising it.
FAQ: What Are REITs and How Do They Work?
Are REITs riskier than regular stocks?
They carry different risks rather than uniformly higher ones. REITs are more sensitive to interest rate changes, as shown by the 25% decline in 2022. But the mandatory 90% distribution and physical asset backing provide stability that pure growth stocks lack. For a diversified portfolio, REITs offer more income than typical equities, more volatility around rate cycles than bonds, and genuine diversification benefits when combined with both.
What is the difference between an equity REIT and a mortgage REIT?
An equity REIT owns and operates physical properties. Income comes from rents. A mortgage REIT lends money against real estate or buys mortgage-backed securities. Income comes from the spread between borrowing and lending rates. Mortgage REITs offered a 12.2% average dividend yield as of December 2025, versus 3.97% for equity REITs. The higher yield reflects higher risk: mortgage REITs can cut dividends rapidly when rate spreads compress.
Can REITs replace owning a buy-to-let property?
Not directly, but they provide real estate exposure without most of the problems of direct ownership. A buy-to-let requires significant capital, ongoing management, concentration in a single asset, and illiquidity. REITs give you fractional ownership of a professionally managed, diversified property portfolio that you can buy or sell in seconds. For most people, REITs are a more practical form of real estate exposure.
How much of a portfolio should be in REITs?
Research consistently suggests a 5 to 15% allocation produces the best risk-adjusted diversification benefit. Below 5% the allocation is too small to move the needle. Above 15% you accumulate real estate concentration risk. Someone in accumulation might sit at 5 to 8%. Someone relying on portfolio income in retirement might reasonably go to 10 to 15%.
Conclusion
REITs are a genuinely useful investment tool when used correctly. The mandatory 90% dividend distribution creates yields structurally above the broad equity market. The physical asset backing and low correlation to other asset classes provide real diversification benefits. The liquidity of publicly traded REITs gives you real estate exposure without the capital requirements and management burden of direct ownership.
They are not a free lunch. Interest rate sensitivity creates volatility around rate cycles. The ordinary income tax treatment of dividends erodes net yield in taxable accounts. And mortgage REITs carry risks that most retail investors underestimate.
The sensible entry point for most investors in 2026 is a low-cost REIT index ETF, held inside a tax-sheltered account, at a 5 to 10% portfolio allocation. Start there, understand what you own, and let the dividend income compound.