Thoughts on REITs, preferred shares, and how to get started?

Anyone have experience with and thoughts on REITs? What place do they have in a typical portfolio? How do you screen for them? When are preferred shares better than common shares?

I dipped my toe in with NLY a few years ago and have been disappointed. I’m considering taking another shot at investing in REITs, wondering if its even worth bothering.

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Like anything investment related, if you want to do it well I’m sure you can make good money at it. But that takes a fair bit of time and effort. You could buy VNQ or whatever REIT index fund or etf if you wanted to be lazy, but double check the chart going through 2007-2009 to make sure you want that level of risk. REITs are already fairly leveraged so when the asset values fall, the stocks can fall a LOT. I think they were down 75% or so in the 2008 crisis?

Preferred REIT stocks are a lower risk, lower return way style investment. You’ll never make much more than the coupon, say 5-7% depending on the risk of the issuer (unless you’re trading really distressed ones), but you do have interest and credit risk to the downside. Kinda like a covered call - limited upside, penalty of downside… works if the market stays flattish, basically, otherwise you’d rather not have owned either (downside) or rather have been long the common (upside).

On the bright side, both types of REIT investments get a new kind of 199 tax break under the trump tax cuts, so their tax inefficiency isn’t as bad as it used to be.


I haven’t researched NLY, but can you say why you’ve been disappointed? It might lead to better answers. Many years ago, I unwisely bought a health care REIT whose portfolio consisted of a third devoted to one health care operator that went bust. The dividend was suspended. The stock tanked. I believe it eventually recovered, but that’s what I’d call a disappointment.

I’m mainly a fixed income investor, due to a past of extremely poor stock picking. It’s worked for me. However, I’ve recently bought PSK, SPYD, PFF and am comfortable with that decision.

Why do you want to invest in REITs? Is it just to “diversify?” If so, I’d suggest you look at some overlaid charts comparing to other investments or indicators over various time periods. If they match, or are shifted, but otherwise match, you really aren’t diversifying out of the systemic stock market risk.


Thanks, everyone, for your thoughts.

I had looked into that as it’s my typical strategy, but it seems like the quality varies widely and it would be better to analyze individual REITs. It’s a lot of work, though.

Actually, I take that back. I had been looking at the price and forgotten about dividends (I usually reinvest them but didn’t in this case). It’s actually done pretty well. I intended to get into REITs years ago, I started with a small position in NLY and then got busy with a new work project and kinda forgot about it. Most of my portfolio is index funds, so I don’t pay much attention to my holdings.

Diversification and experience in income investing. As I’ve been reading more, it seems like they are not as uncorrelated with stocks as I thought, but that’s not a deal breaker.

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