Income investors are often looking for a few key factors before making an investment. First, income investors want high dividend yields. With interest rates still near historic lows, bond yields have plunged over the past few years. And, with the S&P 500 Index near a record high, the average dividend yield of the S&P 500 has dropped to 1.5%.
Next, income investors want safety. High yields are not especially appealing if the underlying dividend is cut or suspended. Stocks that satisfy both requirements are hard to find, but Real Estate Investment Trusts (otherwise known as REITs) are especially attractive.
Even better, there are a multitude of REIT ETFs that provide investors with high yields, safe dividends, and additional benefits from owning a basket of securities at once. This article will discuss our top REIT ETF for income investors.
Exchange-Traded Funds, or ETFs, have become increasingly popular over the past several years. It is easy to see why the ETF revolution has taken hold. Investors simply got tired of paying exorbitant fees, sometimes in excess of 1% annually, that are common among traditional mutual funds. Making matters worse, many mutual funds also charged front-end fees, or fees when the investor sold the fund.
By contrast, annual fees on exchange-traded funds are much lower. The other appeal of ETFs is that they offer diversification benefits as opposed to buying individual securities. Lastly, ETFs trade all day, offering greater liquidity than mutual funds, which are priced once at the end of the trading day.
Putting it all together, and it is no surprise that ETFs have seen demand skyrocket at the expense of mutual funds. And, there are now many ETFs that invest in Real Estate Investment Trusts for investors looking to profit from real estate.
ETFs Profiting From Real Estate
For investors specifically wanting to invest in REITs, there are several quality ETFs available. The most well-known REIT ETF is the Vanguard Real Estate ETF (VNQ), the largest real estate ETF in the U.S. with over $36 billion in assets. The fund owns a wide selection of securities mortgage REITs, financial companies, and real estate companies. As a result, while VNQ is not technically a pure-play focused REIT ETF, it offers exposure to real estate and at a very low expense ratio of 0.12%. Vanguard ETFs are particularly regarded for their extremely low fees.
The average dividend yield of VNQ is 3.3% right now, which is not a high yield, but considering the low expense ratio it is still attractive for income investors. However, this is not our favorite REIT ETF right now. That stipulation goes to the Global X SuperDividend REIT ETF (SRET).
SRET has a number of attractive qualities that set it apart from the competition. First is its high dividend yield above 6%, which is significantly higher than the typical REIT ETF. And, investors do not have to sacrifice quality for such a high yield. SRET offers all the diversification benefits investors look for in ETFs, with exposure to multiple subsectors of REITs and different global geographic markets.
While SRET has a relatively high expense ratio for ETFs at 0.59%, investors are still better off given the elevated dividend yield. In addition, SRET pays shareholders on a monthly basis, giving investors 12 dividend payouts per year instead of the typical four under the quarterly distribution schedule.
The Bottom Line
ETFs have become extremely popular with investors looking for diversification benefits with all-day trading, and significantly lower annual fees than traditional mutual funds. There are now a variety of ETFs that cover virtually every market sector and asset class, including Real Estate Investment Trusts.
Investors can either purchase REITs individually, or do so through an ETF which allows the investor to purchase a basket of stocks at one time. For investors more interested in going the ETF route, we favor SRET as a high-yield play with exposure to REITs.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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