Why you may not need ASX REITs for dividends

ASX real estate investment trusts (REITs) can be a great buy for income investors, but are there better options available on the market?

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fingers walking up piles of coins towards bag of cash signifying asx dividend shares

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Many investors like real estate investment trusts (REITs) for dividends. However, you may not need to concentrate your portfolio in companies likeĀ Mirvac GroupĀ (ASX: MGR) if income is what you’re after.

Why you may not need ASX REITs for dividends

The Aussie REITs are required to pay out above 90 per cent of their earnings each year as part of the trust structure. That has historically made them strong ASX dividend shares which income investors love.

However, there are plenty of other ASX shares that have strong yields over and above the ASX REITs.

That includes companies likeĀ Fortescue Metals Group LimitedĀ (ASX: FMG) with 10.5% andĀ New Hope Corporation LimitedĀ (ASX: NHC) with 11.7%.

I think there are other ASX dividend shares out there outside of the real estate offerings which means investors have plenty of options.

What if I want to invest in real estate?

Investing in ASX REITs makes more sense if you want an allocation to real estate. Buying private real estate is expensive in many parts of the country and comes with significant tax and transaction costs.

That means shares like Scentre GroupĀ (ASX: SCG) could be good exposure. However, unlike private real estate these investments don’t receive favourable tax treatment, which is a big negative.

There’s also the argument that you get plenty of exposure to ASX REITs via a broad market exchange-traded fund (ETF). Buying something likeĀ BetaShares Australia 200 ETFĀ (ASX: A200) provides exposure to nearly all the same investments as the S&P/ASX 200 IndexĀ (ASX: XJO).

That includes your favourite ASX REITs alongside even more diversified exposure to other sectors.

Foolish takeaway

If you want targeted exposure then ASX REITs can be your friend. You can choose to just invest in commercial, residential, office, retail and many more real estate areas based on your choices.

However, if you’re just looking for a strong dividend, I don’t think you need to look only at REITs.

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Returns As of 15th February 2021

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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