This is an educational explainer, not investment advice.

The basic idea

A REIT (pronounced "reet"), or real estate investment trust, is a company that owns or finances income-producing property and lets anyone buy a slice of it through ordinary shares. Think of it as a fund for buildings: rather than pooling money to buy stocks, investors pool money to own shopping centers, apartments, warehouses, hospitals or data centers — assets that would otherwise take millions of dollars to buy directly. Congress created the structure in 1960 specifically to open real estate to everyday investors, according to Nareit, the industry's trade group.

The rule that defines a REIT

To qualify for its special tax status, a REIT must pay out at least 90% of its taxable income to shareholders each year as dividends — cash payments sent directly to the people who own the shares, per the SEC. Because almost all of the profit flows out rather than being kept or taxed at the company level, REITs tend to carry higher dividend yields than typical stocks. (A yield is the annual dividend divided by the share price: a 5% yield pays $5 a year per $100 invested.)

How they work

Publicly traded REITs behave like stocks — you buy and sell them in a brokerage account during market hours, and the price moves through the day. That liquidity is a key difference from owning a building directly, where a sale can take months.

There are two broad kinds. Equity REITs own physical property and collect rent — the most common type, spanning retail, industrial, residential, healthcare and data-center sectors. Mortgage REITs own no buildings; they lend to property owners or hold mortgage-backed securities, earning interest instead of rent, which makes them especially sensitive to interest rates.

Two REITs, two strategies

Federal Realty (FRT) runs a small, curated portfolio — roughly 100 mixed-use properties concentrated in affluent coastal markets. Its calling card is consistency: the company says it has raised its dividend every year for nearly six decades, which it describes as the longest such streak in the REIT industry — putting it among the "Dividend Kings," companies with 50-plus years of annual increases.

Realty Income (O) takes the opposite tack: scale. It owns more than 15,000 properties across the U.S. and Europe and brands itself "The Monthly Dividend Company," having paid hundreds of consecutive monthly dividends. Most of its leases are triple-net, meaning tenants cover property taxes, insurance and maintenance on top of rent — a structure that smooths the landlord's cash flow. Its dividend yield has recently sat around 5%. (Exact streak figures and yields change over time; check current filings.)

Why investors use REITs

  • Income: the 90% payout rule generally produces yields above broad stock indexes.
  • Diversification: real estate often moves differently from stocks and bonds.
  • Liquidity: shares sell in seconds, unlike a physical building.
  • Inflation: rents — and so REIT income — have tended to rise with prices over long periods, though that isn't guaranteed.

The risks

Interest rates are the big one. When rates rise, safer bonds start to out-yield REIT dividends, and REITs' own borrowing costs climb — so REIT prices often fall in rising-rate periods. Sector risk is real too: a retail REIT suffers when shopping moves online; an office REIT suffers when remote work cuts demand for space. And taxes are less favorable than many expect — REIT dividends are generally taxed as ordinary income, at your full marginal rate, rather than the lower rate on most stock dividends (though a portion may qualify for a 20% deduction under current law; ask a tax adviser).

The metric that matters: FFO

Don't judge a REIT by ordinary earnings per share. Accounting rules force buildings to depreciate on paper, which dents reported profit even when the property is holding or gaining value. Nareit created funds from operations (FFO) in 1991 as the fix: it adds that depreciation back and strips out one-time property-sale gains, giving a cleaner read on the cash a REIT's buildings actually throw off, per Nareit. Analysts compare REITs on FFO, not EPS.

Federal Realty and Realty Income show the range inside a single asset class — one a concentrated, premium portfolio, the other a vast income machine. The point isn't which to buy; it's that REITs, as a category, offer an accessible, liquid way into real estate that a smart non-specialist can actually understand.