Vanguard
VNQ Expenses: 0.12%
VGSIX Expenses: 0.26%*
VGSIX Minimum Investment: $3,000*
Dividend Yield:3.9%
Real estate investment trusts have such a prominent place in the SPHD in part because they’re one of the highest-yielding sectors — and that’s by design.
REITs — which typically own and often operate properties — were created by Congress in 1960 to allow investors an avenue for investing in real estate. These companies don’t have to pay federal income tax, but as a trade-off, must distribute at least 90% of their taxable income back to shareholders in the form of dividends. While yields on traditional equity REITs vary widely, it’s not uncommon to see them throw off yields in the high single digits.
Real estate-focused ETFs and mutual funds that are market-cap weighted tend to invest most heavily in the largest REITs, which tends to tamp down the yields. But the Vangaurd REIT Index Fund (MUTF:VGSIX) and Vanguard REIT ETF (NYSEARCA:VNQ) still offer a payout of nearly 4% at current prices, making them a meaningful source of income.
Vanguard REIT has a wide basket of 158 holdings that span several classes of real estate, from retail to industrial to healthcare and even hotels. This is a balanced portfolio, too, with just a small overweight in top holding Simon Property Group Inc (NYSE:SPG) — a mall operator that makes up roughly 6% of the ETF — but a perfectly acceptable third of the weight in the top 10 holdings.
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While real estate hasn’t performed as well on a price basis as the broader market over the past few years, it has been a source of considerably more income.
*Also available as an Admiral Shares fund, with a 0.12% expense ratio and $10,000 minimum initial investment.