Author Topic: REITs  (Read 1114 times)

Rasputin

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REITs
« on: January 23, 2019, 04:46:26 PM »
Are REITs a good idea for passive income d/t high dividend return? If so, which ones are good? Just an idea. Not sure I want to go that route, but maybe.

MustacheAndaHalf

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Re: REITs
« Reply #1 on: January 23, 2019, 10:49:15 PM »
Stocks can grow when the stock price rises, or when they send money to the owners of the stock.  Together, these two are called the "total return" of the stock.  In general, REITs do not outpace the total return of other stocks.  And they have some tax disadvantages - the money you get is treated as ordinary income.  Most stocks instead issue dividends, which are usually taxed at a lower rate.

If you must own a REIT, it's better to own it in an IRA or 401(k), where the income doesn't incur taxes until you make withdrawals (in retirement, presumably).

Rasputin

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Re: REITs
« Reply #2 on: January 24, 2019, 12:52:36 AM »
Stocks can grow when the stock price rises, or when they send money to the owners of the stock.  Together, these two are called the "total return" of the stock.  In general, REITs do not outpace the total return of other stocks.  And they have some tax disadvantages - the money you get is treated as ordinary income.  Most stocks instead issue dividends, which are usually taxed at a lower rate.

If you must own a REIT, it's better to own it in an IRA or 401(k), where the income doesn't incur taxes until you make withdrawals (in retirement, presumably).

So itíd be wiser to use dividends from, say, VTI as passive income instead?

ysette9

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Re: REITs
« Reply #3 on: January 24, 2019, 02:30:25 AM »
Dividends and stock price appreciation together are a great way to have passive income. See what was said above about total return.

MustacheAndaHalf

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Re: REITs
« Reply #4 on: January 24, 2019, 09:19:40 AM »
Keep in mind dividends are forced on you.  You are taxed on them, regardless of your need for the money.  It's actually better to be able to decide how much you need, and sell that amount of stock.  It might be a mental stretch, but the tax treatment is the same: qualified dividends and stocks held over 1 year are both taxed at a lower rate.

Are you saving for retirement?  What will you do with the dividends now, anyways?  If you're just going to reinvest them, you want lower dividends so you pay less tax.

Hopefully you're also taking advantage of  IRAs or a company 401(k) plan, which is even more tax efficient.

Boofinator

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Re: REITs
« Reply #5 on: January 24, 2019, 09:41:04 AM »
Keep in mind dividends are forced on you.  You are taxed on them, regardless of your need for the money.  It's actually better to be able to decide how much you need, and sell that amount of stock.  It might be a mental stretch, but the tax treatment is the same: qualified dividends and stocks held over 1 year are both taxed at a lower rate.

Are you saving for retirement?  What will you do with the dividends now, anyways?  If you're just going to reinvest them, you want lower dividends so you pay less tax.

Hopefully you're also taking advantage of  IRAs or a company 401(k) plan, which is even more tax efficient.

Dividends aren't forced but are a necessary component of stocks. Dividends are how companies compensate shareholders when expected return from growth no longer exceeds profits. Without dividends or the expectation of dividends in the future (or the expectation of the sale of the company back into the hands of private investors), stocks would be essentially worthless.

So yes, there may be some tax strategy with regards to dividends, but to say they are forced is a mischaracterization of how the stock market works.

Rasputin

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Re: REITs
« Reply #6 on: January 25, 2019, 05:17:50 PM »
Keep in mind dividends are forced on you.  You are taxed on them, regardless of your need for the money.  It's actually better to be able to decide how much you need, and sell that amount of stock.  It might be a mental stretch, but the tax treatment is the same: qualified dividends and stocks held over 1 year are both taxed at a lower rate.

Are you saving for retirement?  What will you do with the dividends now, anyways?  If you're just going to reinvest them, you want lower dividends so you pay less tax.

Hopefully you're also taking advantage of  IRAs or a company 401(k) plan, which is even more tax efficient.

I have TSP (fed employee). I also max out my Roth. The money there is split between VTSAX and a target date fund. I recently opened a taxable account to invest even more money because investing is lots of fun. I only hold VTI. I think I set that up to have the dividends sent to me but Iím not sure.

MustacheAndaHalf

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Re: REITs
« Reply #7 on: January 25, 2019, 06:45:27 PM »
Keep in mind dividends are forced on you.  You are taxed on them, regardless of your need for the money.  It's actually better to be able to decide how much you need, and sell that amount of stock.  It might be a mental stretch, but the tax treatment is the same: qualified dividends and stocks held over 1 year are both taxed at a lower rate.
Dividends aren't forced but are a necessary component of stocks. Dividends are how companies compensate shareholders when expected return from growth no longer exceeds profits. Without dividends or the expectation of dividends in the future (or the expectation of the sale of the company back into the hands of private investors), stocks would be essentially worthless.

So yes, there may be some tax strategy with regards to dividends, but to say they are forced is a mischaracterization of how the stock market works.
What was Berkshire Hathaway's dividend last year?  Zero, because dividends are not a necessary component of stocks.  Further, Berkshire Hathaway has the highest share price in the market, and is not "worthless" as you claim would happen for a stock with no dividends.

You're ignoring growth.  Total return consists of dividends and growth.  If only dividends were considered, everyone would be bragging about utility stocks and ignoring the tech sector.  Dividends don't explain the fascination with "FAANG" stocks in the tech sector.

Some people believe that you need high dividend stocks in retirement.  I disagree, and this is actually my main point.  If you need 2.5% of your taxable account each year, dividends offer a different picture.  Take Vanguard Total Stock Market ETF (VTI) with a dividend of about 2%.  You can then sell stock to make up the additional 0.5%.  But if you instead hold iShares Core High Dividend ETF (HDV), you receive 3% in dividends.  You only need 2.5%, but you get taxed on the full 3%.  Investors in retirement have the option of selling shares rather than relying on dividends for their withdrawals.

Boofinator

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Re: REITs
« Reply #8 on: January 26, 2019, 01:14:37 PM »
Keep in mind dividends are forced on you.  You are taxed on them, regardless of your need for the money.  It's actually better to be able to decide how much you need, and sell that amount of stock.  It might be a mental stretch, but the tax treatment is the same: qualified dividends and stocks held over 1 year are both taxed at a lower rate.
Dividends aren't forced but are a necessary component of stocks. Dividends are how companies compensate shareholders when expected return from growth no longer exceeds profits. Without dividends or the expectation of dividends in the future (or the expectation of the sale of the company back into the hands of private investors), stocks would be essentially worthless.

So yes, there may be some tax strategy with regards to dividends, but to say they are forced is a mischaracterization of how the stock market works.
What was Berkshire Hathaway's dividend last year?  Zero, because dividends are not a necessary component of stocks.  Further, Berkshire Hathaway has the highest share price in the market, and is not "worthless" as you claim would happen for a stock with no dividends.

You're ignoring growth.  Total return consists of dividends and growth.  If only dividends were considered, everyone would be bragging about utility stocks and ignoring the tech sector.  Dividends don't explain the fascination with "FAANG" stocks in the tech sector.

Some people believe that you need high dividend stocks in retirement.  I disagree, and this is actually my main point.  If you need 2.5% of your taxable account each year, dividends offer a different picture.  Take Vanguard Total Stock Market ETF (VTI) with a dividend of about 2%.  You can then sell stock to make up the additional 0.5%.  But if you instead hold iShares Core High Dividend ETF (HDV), you receive 3% in dividends.  You only need 2.5%, but you get taxed on the full 3%.  Investors in retirement have the option of selling shares rather than relying on dividends for their withdrawals.

I understand where you are coming from, however, it doesn't negate my point: dividends, and stock repurchasing (up to a point), are ultimately the only two viable ways for a company to return value to the shareholders. Growth stocks are great, but at some point they can no longer sustain outsized growth given their market size, and must transition into value stocks. BH is an exception, but only due to Buffett's and Munger's genius has it grown to be the behemoth it is today. Buffett goes into some strategies for reinvesting profits in his shareholder letters; take a look starting at page 19: http://www.berkshirehathaway.com/letters/2012ltr.pdf. Note that he makes several assumptions (particularly for sustainable growth rate) to explain why he doesn't think dividends are a good strategy for Berkshire.

Cries

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Re: REITs
« Reply #9 on: January 26, 2019, 01:36:21 PM »
Stocks can grow when the stock price rises, or when they send money to the owners of the stock.  Together, these two are called the "total return" of the stock.  In general, REITs do not outpace the total return of other stocks.  And they have some tax disadvantages - the money you get is treated as ordinary income.  Most stocks instead issue dividends, which are usually taxed at a lower rate.

If you must own a REIT, it's better to own it in an IRA or 401(k), where the income doesn't incur taxes until you make withdrawals (in retirement, presumably).

So itíd be wiser to use dividends from, say, VTI as passive income instead?

Dont bother with REITs.  You dont want extra exposure to institutional-class real estate in this environment.  Rising interest rates destroys enterprise value in REIT structures.  Cap rates are also at absurd levels. 

In addition, broad market funds (VTI) already have a market-weight exposure to all of the major publicly traded REITs (they are components of VTI already).  By buying a REIT-only fund you are just adding extra concentration. 

Just buy VTI and dont think about REITs ever again.  Goodluck.

DreamFIRE

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Re: REITs
« Reply #10 on: January 26, 2019, 01:53:47 PM »
Our old friend boarder42 was a fan of replacing bonds with REITs.

I'm currently going down a path of replacing bonds with REITs - there is a post on the 150 year history of everything - and it makes a strong case for a very large holding in a diversified REIT index.  i think my AA for when i'm FIREd may switch to 50/50 REIT to equity or will have REITs replace bonds and represent 10-20% of my total holdings.

basically RE has performed basically at the same return as equities with much less volatility and with very little correlation to equities.  so there is a strong case for no bonds at all and an increase in REIT and small cap exposure both pre FIRE an post FIRE IMO.

Rasputin

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Re: REITs
« Reply #11 on: January 26, 2019, 01:55:17 PM »
Stocks can grow when the stock price rises, or when they send money to the owners of the stock.  Together, these two are called the "total return" of the stock.  In general, REITs do not outpace the total return of other stocks.  And they have some tax disadvantages - the money you get is treated as ordinary income.  Most stocks instead issue dividends, which are usually taxed at a lower rate.

If you must own a REIT, it's better to own it in an IRA or 401(k), where the income doesn't incur taxes until you make withdrawals (in retirement, presumably).

So itíd be wiser to use dividends from, say, VTI as passive income instead?

Dont bother with REITs.  You dont want extra exposure to institutional-class real estate in this environment.  Rising interest rates destroys enterprise value in REIT structures.  Cap rates are also at absurd levels. 

In addition, broad market funds (VTI) already have a market-weight exposure to all of the major publicly traded REITs (they are components of VTI already).  By buying a REIT-only fund you are just adding extra concentration. 

Just buy VTI and dont think about REITs ever again.  Goodluck.
Most of my Roth is in VTSAX. It is growing like a weed. Iím gonna retire rich a shell. Maybe Iíll buy a yacht and throw wild parties. Anyhow, I can REITS are worthless to me. I intend to have so much money to live off the dividends. And live well. Yeah!!!! Money!!!!! Yay!!!!

Cries

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Re: REITs
« Reply #12 on: January 26, 2019, 02:05:51 PM »
Our old friend boarder42 was a fan of replacing bonds with REITs.

I'm currently going down a path of replacing bonds with REITs - there is a post on the 150 year history of everything - and it makes a strong case for a very large holding in a diversified REIT index.  i think my AA for when i'm FIREd may switch to 50/50 REIT to equity or will have REITs replace bonds and represent 10-20% of my total holdings.

basically RE has performed basically at the same return as equities with much less volatility and with very little correlation to equities.  so there is a strong case for no bonds at all and an increase in REIT and small cap exposure both pre FIRE an post FIRE IMO.

I dont know who that is, but someone should explain to him that the long-term performance of REIT indices is highly correlated with the performance of long-duration bond funds.  Highly sensisitve to interest rate changes. 

You probably shouldnt have long duration risk in this environment. 

Montecarlo

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Re: REITs
« Reply #13 on: January 26, 2019, 03:34:38 PM »
REIT dividends are non-qualified, right?

Can someone let me know if this tax strategy makes sense?


Buy enough REITs to produce $12,000 in annual dividends.  The standard deduction wipes out the ordinary income, and I get that $12K tax free.

Rest of income from stocks that have qualified dividends, and if I need more, selling shares.  That's all capital gains, which at an annual income of $12,000, is 0%.

I make too much to contribute to a traditional IRA, which bones me with this strategy.  Oh, if I only had a time machine and could face punch my younger self...

DreamFIRE

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Re: REITs
« Reply #14 on: January 26, 2019, 05:42:55 PM »
REIT dividends are non-qualified, right?

Just as an example...

About 93% of dividends (including capital gains distributions) were non-qualified on my Vanguard REIT last year.

About 89% of all of my non-REIT dividends were qualified.

Quote
Can someone let me know if this tax strategy makes sense?

Buy enough REITs to produce $12,000 in annual dividends.  The standard deduction wipes out the ordinary income, and I get that $12K tax free.

Rest of income from stocks that have qualified dividends, and if I need more, selling shares.  That's all capital gains, which at an annual income of $12,000, is 0%.

I make too much to contribute to a traditional IRA, which bones me with this strategy.  Oh, if I only had a time machine and could face punch my younger self...

If you have anything in a traditional retirement fund through work that you draw down on, or do Roth conversions from, that will be taxed as ordinary income, so don't forget to factor that in regarding the $12,000 standard deduction (for an individual filer).  When you get to a point that you can draw social security, the taxable portion of SS will also factor in, and that's becoming a larger share every year because the tax threshold for SS is not indexed to inflation while the benefits are.
« Last Edit: January 26, 2019, 08:11:32 PM by DreamFIRE »

DreamFIRE

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Re: REITs
« Reply #15 on: January 26, 2019, 05:46:16 PM »
Our old friend boarder42 was a fan of replacing bonds with REITs.

I'm currently going down a path of replacing bonds with REITs - there is a post on the 150 year history of everything - and it makes a strong case for a very large holding in a diversified REIT index.  i think my AA for when i'm FIREd may switch to 50/50 REIT to equity or will have REITs replace bonds and represent 10-20% of my total holdings.

basically RE has performed basically at the same return as equities with much less volatility and with very little correlation to equities.  so there is a strong case for no bonds at all and an increase in REIT and small cap exposure both pre FIRE an post FIRE IMO.

I dont know who that is, but someone should explain to him that the long-term performance of REIT indices is highly correlated with the performance of long-duration bond funds.  Highly sensisitve to interest rate changes. 

You probably shouldnt have long duration risk in this environment.

He's one of our past experts on investing.  See:

https://forum.mrmoneymustache.com/off-topic/r-i-p-boarder42/

https://www.forbes.com/sites/greatspeculations/2017/07/10/reits-have-complicated-relationship-status-with-interest-rates/
https://www.reit.com/investing/reits-and-interest-rates
https://www.reit.com/news/blog/market-commentary/reit-stock-performance-and-interest-rate-environment

Boofinator

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Re: REITs
« Reply #16 on: January 26, 2019, 06:22:48 PM »
Our old friend boarder42 was a fan of replacing bonds with REITs.

I'm currently going down a path of replacing bonds with REITs - there is a post on the 150 year history of everything - and it makes a strong case for a very large holding in a diversified REIT index.  i think my AA for when i'm FIREd may switch to 50/50 REIT to equity or will have REITs replace bonds and represent 10-20% of my total holdings.

basically RE has performed basically at the same return as equities with much less volatility and with very little correlation to equities.  so there is a strong case for no bonds at all and an increase in REIT and small cap exposure both pre FIRE an post FIRE IMO.

I dont know who that is, but someone should explain to him that the long-term performance of REIT indices is highly correlated with the performance of long-duration bond funds.  Highly sensisitve to interest rate changes. 

You probably shouldnt have long duration risk in this environment.

He's one of our past experts on investing.  See:

https://forum.mrmoneymustache.com/off-topic/r-i-p-boarder42/

https://www.forbes.com/sites/greatspeculations/2017/07/10/reits-have-complicated-relationship-status-with-interest-rates/
https://www.reit.com/investing/reits-and-interest-rates
https://www.reit.com/news/blog/market-commentary/reit-stock-performance-and-interest-rate-environment

Ok, can't sit on the sidelines of that comment. Calling B42 "an expert on investing" is like calling Trump "an expert on making deals".

I'd prefer to call B42 a prolific contributor who had very opinionated views, many of which I found to be overly simplistic to a fault. I miss his contributions, but to call him an expert on investing is just wrong.

DreamFIRE

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Re: REITs
« Reply #17 on: January 27, 2019, 10:42:16 AM »
Our old friend boarder42 was a fan of replacing bonds with REITs.

I'm currently going down a path of replacing bonds with REITs - there is a post on the 150 year history of everything - and it makes a strong case for a very large holding in a diversified REIT index.  i think my AA for when i'm FIREd may switch to 50/50 REIT to equity or will have REITs replace bonds and represent 10-20% of my total holdings.

basically RE has performed basically at the same return as equities with much less volatility and with very little correlation to equities.  so there is a strong case for no bonds at all and an increase in REIT and small cap exposure both pre FIRE an post FIRE IMO.

I dont know who that is, but someone should explain to him that the long-term performance of REIT indices is highly correlated with the performance of long-duration bond funds.  Highly sensisitve to interest rate changes. 

You probably shouldnt have long duration risk in this environment.

He's one of our past experts on investing.  See:

https://forum.mrmoneymustache.com/off-topic/r-i-p-boarder42/

https://www.forbes.com/sites/greatspeculations/2017/07/10/reits-have-complicated-relationship-status-with-interest-rates/
https://www.reit.com/investing/reits-and-interest-rates
https://www.reit.com/news/blog/market-commentary/reit-stock-performance-and-interest-rate-environment

Ok, can't sit on the sidelines of that comment. Calling B42 "an expert on investing" is like calling Trump "an expert on making deals".

I'd prefer to call B42 a prolific contributor who had very opinionated views, many of which I found to be overly simplistic to a fault. I miss his contributions, but to call him an expert on investing is just wrong.

Granted, I was using the term "expert" loosely.

beee

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Re: REITs
« Reply #18 on: February 04, 2019, 12:40:07 PM »
In addition, broad market funds (VTI) already have a market-weight exposure to all of the major publicly traded REITs (they are components of VTI already).

About 4% of Total US Market Index fund are REITs