Next on the list are real estate investment trusts. Like MLPs, REITs are special entities that get preferential tax treatment. REITs avoid corporate-level taxation if they distribute at least 90% of their earnings. The dividends are taxable, and REITs can be held in an IRA account with no tax complications.
There are two types of REITs — mortgage REITs, which buy mortgage securities and related derivatives, and equity REITS, which buy real property ranging from apartments to warehouses and everything in between. I currently invest in both, but for long-term retirement funds I limit myself to equity REITs. Because of their high sensitivity to interest rates movements, I consider mortgage REITs highly speculative and appropriate only for more aggressive strategies.
What makes real estate such an excellent retirement holding? To start, it has a built-in inflation hedge. Assuming they are purchased at reasonable prices and in stable locations, a diversified portfolio of properties should, at a minimum, see their values rise with the overall price level. The same is true of rental income — it’s not often that landlords lower your rent.
Although I use them in certain ETF-only accounts I manage, I’m not the biggest fan of REIT ETFs because they tend to overweight a small handful of REITs that I do not consider particularly attractive.
Where possible, I prefer to buy individual REITs. And in long-term retirement accounts, I’m particularly fond of REITs that specialize in free-standing triple-net-lease properties — things like grocery stores and pharmacies. Two that I own personally — and hope to own for the rest of my life — are Realty Income (O) and National Retail Properties (NNN). Both have a long history of raising their dividends, and both skated through the 2008 meltdown with relatively minor scratches.