Do REIT ETFs Pay Dividends?

Real estate investment trusts (REITs) are companies that own and operate income-generating commercial real estate properties. Most REITs are publicly traded, which provides individual investors access to dividends derived from real estate without the burden of acquiring, managing, or obtaining financing for investment properties. 

In order to qualify as a REIT, the entity must adhere to the following two stipulations: 

• No less than 75 percent of the REITs portfolio of assets have to be tied to commercial real estate. 
• A minimum of 90 percent of the REIT’s taxable income must be returned to shareholders as dividends. 

So all REITs are required to pay dividends to shareholders. Let’s take a closer look at how REIT exchange-traded funds work. 

What is a REIT ETF? 

REIT exchange-traded funds are a form of mutual funds that invests primarily in REIT securities and associated derivatives. Since passively managed REIT EFTs emulate major REIT indexes, they tend to be weighted toward the largest publicly traded real estate investment trusts. 

Real estate investment trusts own and operate income-generating commercial real estate. REIT ETFs, meanwhile, are passively managed indexes of publicly traded REITs. They were created to provide investors with diversified exposure to real estate with one trade. Instead of owning shares of multiple REITs with varying portfolios of investment properties, such as hospitality, senior and student housing, office, or multifamily, investors can purchase shares of a REIT ETF, which contains multiple REITs. For instance, two of the most frequently used REIT ETF indexes contain 123 and 107 REITs.  

A key aspect of REITs is they can avoid almost all corporate taxation provided they pay at least 90 percent of their taxable income back to shareholders in the form of dividends. REITs often return 100 percent of taxable income to shareholders to avoid taxation entirely. The burden of taxation is shifted to individual shareholders of REIT stock. 

REIT exchange-traded funds also pay dividends back to investors. Dividend yield and policies can vary among REIT ETFs, though, so investors should take a careful read of the REIT ETF’s prospectus materials. 

Taxation on REIT dividends is passed on to individual investors. If you received dividends from a REIT ETF in 2023, you should receive a form 1099-DIV this tax season. 

 Dividend payments are split into three categories: 

• Ordinary dividends. This category typically comprises the bulk of your dividend payment. Treat it as ordinary income, which means it will be taxed at your nominal tax rate. 
• Capital gains. Dividends in this category stem from REIT divesting assets for a gain. 
• Return of capital. These payments are generated if cash distributions exceed earnings. Return of capital will lower your cost basis, and you won’t owe any taxes until you sell your shares of the REIT ETF. 

Putting it all Together 

Investing in REIT exchange-traded funds is a way to increase exposure to commercial real estate without having to engage in direct property ownership or hold shares of any singular real estate investment trust. 

REITs and REIT ETFs are required to pay regular dividends to shareholders. However, there are many different REIT ETFs, and many have different concentrations of REITs. Investors should carefully examine the focus of REIT ETFs to ensure the index contains REITs that align with their real estate investment strategies.