REITs versus bonds as yield investments

Investors looking for the highest – but safest – possible returns ultimately compare real estate investment trusts (REITs) to bonds. This is especially true for retirees who want to make the most of their retirement funds. They want the highest possible returns, but they don’t want to risk their capital.

To compare REITs to bonds, take a look at the breakdown of these two asset types:

AEAP

  • Equity investment in a broad portfolio of real estate or mortgages

  • Dividends are paid quarterly and some pay monthly

  • Dividends may increase

  • There is no specific end date

  • The value may increase

  • The value depends on the performance of the properties in the portfolio

  • Shares can be bought through a broker, in shares of an exchange-traded fund (ETF), or in a mutual fund. REITs can also be privately traded

Bindings

  • Debt issued by companies and government entities with a promise to repay the principal plus interest over a specified period of time

  • Interest is paid every six months

  • Fixed interest

  • Set an expiration date

  • It matures 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), shares of an ETF, or a bond fund. US Treasury bills, notes

Comparison of REIT and Bond

Here’s an example of how a corporate bond and a REIT compare:

  • An investor can buy an S&P-rated Cigna bond from an online broker that expires March 15, 2031, for $1,000. This is a callable bond that yields 2.375%. It can be bought for $843.93, giving it a yield to maturity of 4.615%.

  • Now compare this Cigna corporate bond to the Arbor Realty Trust Inc. REIT. The closing price per share on September 9, 2022 was $15.12. There is no expiration date and it yields 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 — the corporate bond or the REIT?

Taxation of AEEAP Dividends and bond interest

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

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

So AEEAP or bonds? What do you prefer?

Important news highlights from today’s private markets

  • The private debt investment platform Percent is launching a new corporate debt offering for Tiger, an international VC-backed software company, with an APY of 15-17%. The platform’s recent 1H update shows an average historical return of 12.38%.

  • The CalTier Multi-Family Portfolio Fund recently completed a new investment in a portfolio of four apartment buildings consisting of 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 annual cash return of 7.02%.

Find more new and alternative investment offers at Benzinga Alternative Investments

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