REIT Distributions vs. Corporate Dividends

Nugget of the week

Tax rate: Most REIT distributions are non-qualified dividends taxed at ordinary income tax rates. Corporations usually pay qualified dividends taxed at lower capital gains tax rates.

Timing: REITs’ return of capital (RoC) distributions reduce shareholders’ cost basis and defer taxation until shares are sold. Corporate dividends cause immediate tax liabilities.

Payout ratio: REITs must distribute most profits to shareholders, typically resulting in substantial yields. Corporations pay discretionary (if any) dividends, leading to lower yields.

Capital gains: REITs must distribute capital gains from property sales. Corporate stocks only generate capital gains when investors sell shares.

RoC: REITs often distribute RoCs. Corporations rarely do.