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If you’ve been thinking about adding real estate investment trusts (REITs) to your portfolio, now is a good time to do so. And if you’re at a time of your life when you need high income the most, the following article is must-reading.

The analyst consensus is that real estate—particularly commercial real estate—will rebound in 2023. Income-generating REITs are still a superior investment compared with Treasuries and bonds.

As the Federal Reserve continues to tighten, conventional wisdom says that higher interest rates are bad for REITs. But rather than obsessing about the Fed’s next move and letting it dissuade you from putting money into a REIT, you’re better off focusing on the stock’s quality and long-term prospects.

To be sure, REITs are vulnerable to rising interest rates. Higher rates make their dividend payouts less attractive to investors, and they also push up REITs’ borrowing costs to finance new projects.

However, a rebounding economy also gives REITs the opportunity to raise their rental rates. Although the U.S. economy slowed in 2022, it’s starting to show resilience in 2023.

Below, I’ll take a closer look at a specialty area that allows the right REITs to offer robust dividend yields, as well as capital appreciation. But first, here’s a bird’s eye view of how these investments work—and how you can benefit from them.

REITs 101

U.S. REITs came into being in September 1960, when President Eisenhower signed the REIT Act (contained in the Cigar Excise Tax Extension of 1960) into law.

Picture owning rental property without the hassles of being a landlord—chasing down rent from delinquent tenants, being called out of the blue to fix a broken appliance, cleaning up after said tenants move out—and you’re starting to get a sense of what it’s like to invest in a REIT.

REITs typically own and manage a portfolio of income-producing properties, such as apartment buildings, shopping malls, offices and hotels. They trade on stock exchanges, just like regular corporations, making investing in real estate easy—and highly liquid.

In addition, REITs let you tap into the market at a far lower upfront cost than buying property on your own. They also let you access areas that would otherwise be difficult, if not impossible, for the average investor to get into.

REITs come in two main varieties:

• Equity REITs own or invest in commercial properties and collect rent from tenants. After paying the costs associated with running these assets, they then pass most of the income they collect on to shareholders as dividends. Holdings range from apartment buildings to malls, office buildings, hotels and even timberlands—though REITs tend to specialize in one specific area.
• Mortgage REITs provide money for real estate, either directly in the form of mortgages or other types of loans or indirectly by acquiring mortgage-backed securities. Mortgage REITs represent less than 10% of the REIT marketplace, so when investors talk about REITs, they’re generally referring to the equity variety.

“High” flying REITs…

Some of the most profitable REITs cater to the marijuana industry.

Yup, you read that right…the marijuana industry. As it becomes increasingly legal, pot has transitioned from a rebellious act to a mainstream business.

Demand for weed is exploding around the world, but a lot of pot stocks will never turn a profit, leaving their shareholders holding the, um, bag. But REITs offer the stability, growth, and income that all those risky penny pot stocks simply can’t.

The marijuana industry is undergoing its first wave of large-scale real estate construction, which means there’s scant existing real estate with buildouts that meet both operational and regulatory requirements. Cannabis-related REITs are filling the void.

In fact, my colleague Jim Pearce (pictured) has pinpointed a trio of REITs that are the best-of-breed in the cannabis sector.

Jim Pearce is the chief investment strategist of Personal Finance, Mayhem Trader, and Personal Finance Pro.

Jim is recommending three REITs that stand to profit no matter which companies end up being the winners of the marijuana boom, because they provide an essential service…real estate.

To learn more, click here.

John Persinos is the editorial director of Investing Daily.

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