Chief Income Strategist Marc Lichtenfeld talks about a popular topic among income investors: real estate investing. Here’s why Marc thinks real estate should have a place in your portfolio.

The other day, I was talking to my wife about one of our real estate investments. My teenage daughter overheard and started asking questions about our strategy.

I explained that we invest in real estate in order to generate passive income. I said that my goal when I retire is to never have to touch my investment principal.

My daughter knows and understands my preference for dividend stocks. They also generate reliable passive income and offer the chance to grow that income if invested in Perpetual Dividend Raisers (stocks that raise their dividends every year).

But while dividend stocks are a major part of my long-term strategy, income-generating real estate also plays a significant role…

However, my days of being a landlord are over. I don’t enjoy wondering what day (or if) the tenant will pay this month, finding repairmen to fix things that seem to break every month or feeling disgusted with how renters keep the place.

So today, my real estate investing includes various partnerships that are involved with hotels, apartment complexes and houses.

Real Estate Investing: REITs

Individual investors can also get exposure to all kinds of real estate by investing in real estate investment trusts (REITs).

These are stocks of companies that invest in real estate and by law must return 90% of their income back to shareholders in the form of dividends.

There are REITs that invest in nearly every kind of real estate you can think of… and others you wouldn’t think of.

There are plenty that are landlords to hotels, retail space, nursing homes, self-storage facilities and apartments. But there are also some that own billboards, cell towers and data centers.

In fact, there are 192 publicly traded REITs out there, which together own $2 trillion worth of assets.

REITs have outperformed the S&P 500 in 15 of the past 25 years – though in 2020, they are trailing badly. This is not surprising considering the pandemic and concerns that many businesses won’t be able to pay rent.

Income investors love REITs because of their high dividends. The average yield for the sector is 3.97%, though there are many companies that pay significantly more.

For example, Global Net Lease (NYSE: GNL), which owns commercial real estate and whose top tenants include FedEx, Whirlpool and ING Group, sports a yield of more than 9%.

Sabra Health Care REIT (Nasdaq: SBRA) yields more than 8% from real estate connected to skilled nursing facilities and senior housing.

Whitestone REIT (NYSE: WSR) owns retail space in the Sun Belt and pays shareholders a monthly dividend that comes out to more than 6.5% per year.

While these yields are enticing, you don’t want to overload your portfolio with REITs. Difficult economic times (like we’re experiencing now) or rising interest rates can negatively impact REITs’ stock price performance and ability to pay dividends.

But when carefully chosen and held as part of a diversified portfolio, particularly one where the goal is to generate income, real estate investing can play a very important role.