Do REITs have to pay out most of their income as dividends?
Yes. To keep their special tax status, U.S. REITs are legally required by the IRS to distribute at least 90 percent of their taxable income to shareholders as dividends each year. That's why REITs typically offer higher yields than most stocks and why they appeal to income-focused investors. The tradeoff is that because they pay out so much, they retain less cash to reinvest, and much of the dividend is taxed as ordinary income rather than at lower qualified-dividend rates. This payout rule also means REIT dividends can fluctuate with the underlying rental income and property performance. If you rely on the income, understand it isn't guaranteed and can be cut during downturns, as many REITs did during the 2020 pandemic.
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