Comparing REIT Yields With the S&P 500

Here’s an example of how crazy markets can be.

I wanted to see a historical comparison of the dividend yields on REITs versus the yield on the S&P 500. REITs are real estate investment trusts. To keep their tax status, REITs have to pay out nearly all their income as dividends. As a result, REITs usually have high dividend yields.

I looked at the Vanguard REIT Index Fund (VGSIX) as a proxy for the REIT sector (it’s not perfect but it works for our purposes). I then looked at the trailing dividend yield and compared it with the Vanguard 500 Index Fund (VFINX).

During the tech bubble when no one was interested in dividends, the REIT sector as a whole was offering yields of more than 8.5% while the S&P 500 was yielding less than 1.5%. That’s insane, but the conditions lasted for years. It took a massive real estate rally to push REIT yields below 5%, and even that took six years.

We’ve gone from one extreme to another. Only now does the yield difference look appropriate.

Posted by on May 16th, 2011 at 12:59 pm


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