REITs

Why should you invest in REITs (Real Estate Investment Trusts)? So that you can be a landlord without the day-by-day hassles! Their high dividend yields can also help you create a passive stream of income.

Here is how Wikipedia defines them:

"A Real Estate Investment Trust is a tax designation for a corporation investing in real estate that reduces or eliminates corporate income taxes. In return, they are required to distribute 90% of their income, which may be taxable, into the hands of the investors."

• Simon Properties (SPG) owns malls. In fact your neighborhood mall is probably owned and operated by Simon. Mine is.
• Equity Residential (EQR) owns apartments.
• Sovran Self Storage (SSS), as the name suggests, owns self-storage units.

High Yield

The other part of the definition has to do with avoiding double-taxation. Corporations in general are required to pay income taxes on their profits, and you the shareholder is required to pay taxes on the dividends you receive. Real Estate Investment Trusts are exempt from taxation at the corporate level, but have to pay out most of their profits to the shareholders. This is why they pay unusually high dividends - which is why I think they belong in a portfolio designed to generate significant passive income.

Look for Sustainable Dividends

When you research an individual REIT to invest in, make sure you understand how it makes money. The key point to understand is whether the current dividend is sustainable. It is easy to get lured by their high yields, but not all of them are sustainable. Investing in a Real Estate Investment Trust that has a currently lower - but potentially faster-growing - yield is some times the better thing to do.

Highly Recommended Resource

• individual stocks
• open-end mutual funds
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• exchange-traded funds (ETFs)