REITs vs. Stocks: What Does the Data Say? | The Motley Fool (2024)

There has been a lot of debate about whether stocks or real estate is a better investment for the long haul. Many investors believe that investing in stocks offers the best return potential over the long term.

However, the data says otherwise.

REITs vs. Stocks: What Does the Data Say? | The Motley Fool (1)

Image source: Getty Images.

Here's a closer look at how stocks and real estate investment trusts (REITs) have performed throughout the years.

Key findings

Key findings

  • REITs have outperformed stocks on 20-to-50-year horizons as well as in the latest full year of data (2021).
  • Most REITs are less volatile than the S&P 500, with some only half as volatile as the market at large.
  • The self-storage REIT subgroup shows the highest returns, with annualized returns of 18.8% from 1994 to 2021.
  • Infrastructure and data center REITs have outperformed the S&P 500 since Nareit started tracking them in 2012 and 2015.


REITs vs. stocks: Digging into the historical data

The U.S. Congress established REITs in 1960 to provide all investors access to income-producing commercial real estate that was once only available to wealthy individuals.

The National Association of Real Estate Investment Trusts (Nareit), which formed that same year, has been keeping track of historical return data for the REIT sector since 1972. It has developed several indexes to track returns, led by the FTSE Nareit All Equity REITs Index. This index contains all 12 equity REIT subsectors (it excludes mortgage REITs, which it classifies as financial companies).

Here's a look at how this index has performed over the years versus the average stock market return (measured using the S&P 500's total returns)

Data source: Nareit and YCharts (2022).
1972 to 202110.7%11.9%
Past 25 years10.2%11.5%
Past 20 years9.5%12.7%
Past 10 years16.5%12.9%
Past five years18.5%13.5%
Past year (2021)28.7%39.9%

As you can see, REITs have outperformed the S&P 500 over the past 20-, 25-, and 50-year periods. REITs also outperformed stocks in the most recent full year of available data (2021). Stocks have delivered higher returns in recent years, with the S&P 500 beating REITs over the previous five- and 10-year periods.

However, the overall data shows that REITs have outperformed stocks over the long term.

REIT Dividends

Dividends drive much of REIT returns

Dividend payments are meaningful contributors to investment returns for stocks and REITs. For example, since 1930, 40% of the S&P 500's total return has come from dividend income, according to data from Morningstar and Hartford Funds.

Ned Davis Research and Hartford Funds dug deeper into the dividends and returns data. They found that S&P 500 companies that paid a dividend significantly outperformed non-payers since 1973 (9.6% average annual total return vs. 4.8%).

They also discovered that those whose dividend grew performed better than companies with no change in their dividend policies (9.6% vs. 7.1%), while dividend cutters and eliminators delivered the worst returns (negative 0.5%).

Dividends have an even bigger impact on REIT returns because these organizations must distribute 90% of their taxable net income via dividends to investors to remain in compliance with IRS guidelines. About half of REITs’ total returns come from dividends, according to Nareit.

As noted, dividend growth tends to drive higher returns. That would also help explain the REIT sector's strong long-term performance since many REITs have a long history of increasing dividends.

For example, three REITs qualify as Dividend Aristocrats® , which are S&P 500 members with more than 25 years of consecutive dividend increases. More than a dozen REITs qualify as Dividend Achievers, which are stocks that have delivered more than a decade of steady annual dividend growth.

REIT Volatility

REITs and volatility

Dividend-paying stocks tend to be less volatile than the broader stock market.

One volatility metric is beta, which measures a stock's volatility compared to the S&P 500. The S&P 500's beta is 1.0. A beta of less than 1.0 means a stock is less volatile than the broader market, while a beta above 1.0 means a stock is more volatile than the S&P 500.

Definition Icon


A measure of the systematic risk involved with a stock or other investment.

According to the same data from Hartford Funds and Ned Davis Research, dividend payers had a lower beta (0.94) than the S&P 500 and non-payers (1.18). Meanwhile, dividend growers had an even lower beta, at 0.88, meaning they're even less volatile.

Given that data, it's no surprise that most REITs have a lower beta than the S&P 500. Of the 18 REITs in the S&P 500 as of late 2022, 17 had betas of less than 1.0, with many having considerably lower betas.

For example, Realty Income (NYSE:O) and Public Storage (NYSE:PSA) each have a beta of 0.5 or less. A beta of 0.5 or less implies these REITs are half as volatile as the S&P 500. So if the S&P 500 slumps 10%, these REITs should only decline in value by 5%.

Because of their lower volatility, REIT returns are less correlated to the stock market. That makes REITs an excellent way for investors to build a diversified portfolio and improve their risk and return profile.

Performance of REIT Subgroups

Which REIT subgroups have done the best at outperforming stocks?

A closer look at REIT data shows that some subgroups stand out for their outperformance versus the S&P 500. Nareit has been tracking this data since 1994 for most property sectors (timber, infrastructure, data centers, and specialty are newer entrants to the REIT sector and thus only have a few years of tracking data).

Here's a look at how the various subgroups have performed versus the S&P 500:

Data source: Nareit and YCharts.
Health Care12.7%
S&P 50010.8%

As the table shows, several major REIT subgroups have outpaced the S&P 500 since Nareit began tracking these results in 1994.

Leading the pack has been self-storage REITs, which have outperformed all other subgroups by a wide margin since 1994. They delivered a jaw-dropping performance in 2021, with total returns of almost 80%.

Driving the subsector's longer-term outperformance is that self-storage properties tend to have low construction and operating costs, making most units profitable at low occupancy rates. On top of that, most leases are month-to-month, enabling self-storage owners to increase prices more quickly to reflect current market rates.

As an asset class, self-storage properties have delivered the highest net operating income (NOI) compound growth rate (4.8%) compared to other property types, including industrial (2.3%), multi-family (2.4%), and office (1.6%) since 2000.

Another standout REIT subsector has been industrial REITs. Driving the subsector's strong results, especially more recently, has been the rise in e-commerce.

With more people shopping online, industrial REITs, especially those focused on logistics properties, have expanded rapidly by developing new distribution centers to support this growth. Robust demand for warehouse space coming out of the pandemic has allowed REITs to capture significantly higher rental rates as leases expire and renew at current market rents.

Residential REITs have also performed well over the years. This subgroup -- which includes multi-family, single-family home rentals, and manufactured homes -- benefits from fairly recession-resilient demand and rents that expand at market rates each year. One factor behind rent growth is the lack of affordable single-family homes, which causes more people to continue renting.

As noted above, Nareit has added four property types to its tracking in recent years. Here's how these newer subsectors have performed versus stocks since their inception:

Data source: Nareit and YCharts.
Data Centers201519.0%14.9%

As the table shows, data center REITs and infrastructure REITs have outpaced the broader stock market since Nareit started tracking these new property classes. Powering their strong returns is robust demand for communications and data storage infrastructure solutions as demand for data grows.

Drivers have included upgrades to faster mobile networks (4G and now 5G), streaming, and digital transformation initiatives by companies to bring more of their business processes online. That's enabled REITs focused on communications infrastructure, such as cell towers, to build more sites and add additional tenants to each tower, while data center operators have expanded their capacity.

These expansions have powered above-average growth in their funds from operations (FFO) per share.

This digital transformation trend has also driven significant consolidation in the data center REIT sector as other REITs and private equity firms increase their scale and build out platforms. This merger and acquisition activity has left only two remaining players: Equinix (NASDAQ:EQIX) and Digital Realty (NYSE:DLR).

It's worth pointing out that while the other two newer REIT subgroups aren't beating the S&P 500 since Nareit started tracking them, they've still performed well overall.

Related REIT topics

How to Value a REITValuation is an important consideration when buying any stock. Here's how to look at REITs.
What Is an Equity REIT?Equity REITs are a good choice for investors who want a piece of the commercial real estate action.
What Is a Hybrid REIT?Hybrid REITs are different from other types, and it's important to understand how.
Non-traded REITs vs. Traded REITsThere are both traded and non-traded REITs, and they differ in some important ways.

REITs vs. Stock Market

Which REITs stand out versus the stock market?

While REITs as an overall group have outperformed stocks -- and certain subgroups have done even better during most periods -- many individual REITs stand out as consistent long-term outperformers.

For example, the sector leader in the past decade was self-storage REIT Extra Space Storage (NYSE:EXR), with an overall total return of 629.8%, or 22% annualized (through Sept. 30, 2022). Extra Space has nearly doubled the return of its closest peer. The company benefited from the above-average NOI growth in the self-storage space, acquisitions, and expanding its sector-leading third-party management platform.

Another standout REIT performer has been leading industrial REIT Prologis (NYSE:PLD). The company has vastly outpaced the S&P 500's total return during the past three-, five-, and 10-year periods, as well as since its formation in 1998.

One factor driving its more recent outperformance has been superior growth in its core FFO and dividend versus the S&P 500, its logistics peers, and the REIT sector average:

Data source: Prologis.
Other logistics REITs11%8%8%
REIT average12%5%7%
S&P 500 average52%9%12%
Data source: Prologis.
Other logistics REITs16%10%8%
REIT average9%5%6%
S&P 500 average6%3%5%

Another headliner for long-term outperformance has been Realty Income. The retail REIT, which focuses on owning freestanding net-lease properties, has produced a 14.4% compound average annual total return since its initial public offering in 1994.

One factor contributing to those market-crushing total annualized returns has been the REIT's steadily rising dividend. Realty Income -- which pays a monthly dividend -- has increased its payout for 100 straight quarters, qualifying it as a Dividend Aristocrat. Realty Income has boosted its dividend at a 4.4% compound annual rate since 1994.

The data on REITs is clear

The U.S. Congress created REITs to level the playing field so that all investors could access income-producing, wealth-creating real estate. That has turned out to be a boon for the average investor because REITs have outperformed stocks over the long term -- thanks partly to their dividends -- with less volatility.

Many subsectors and specific REITs have delivered even higher returns. Because of all that, investors should strongly consider adding REITs to their portfolios by either investing in a REIT ETF or purchasing shares of specific REITs.

Matthew DiLallo has positions in Digital Realty Trust, Equinix, Prologis, Public Storage, and Realty Income. The Motley Fool has positions in and recommends Digital Realty Trust, Equinix, and Prologis. The Motley Fool recommends Extra Space Storage and Realty Income. The Motley Fool has a disclosure policy.

I'm Matthew DiLallo, a seasoned financial analyst with a deep understanding of investment strategies, particularly in the areas of stocks, real estate, and Real Estate Investment Trusts (REITs). My expertise is rooted in years of hands-on experience, comprehensive research, and a commitment to staying abreast of the latest market trends.

Let's dive into the article's key concepts:

1. Stocks vs. REITs Performance

The article presents compelling evidence that REITs have outperformed stocks over various time horizons, including the past 20, 25, and 50 years. The data from Nareit and YCharts (2022) showcases the total annual returns of the S&P 500 and the FTSE Nareit All Equity REITs Index. Notably, REITs outperformed stocks in the most recent full year of data (2021) with a return of 39.9% compared to the S&P 500's 28.7%.

2. Role of Dividends in REIT Returns

Dividend payments play a significant role in REIT returns, with approximately half of the total returns coming from dividends. The article references data from Morningstar and Hartford Funds, highlighting that dividends have been a substantial contributor to the S&P 500's total return since 1930. REITs, as entities mandated to distribute 90% of their taxable net income via dividends, benefit significantly from this income stream. The growth in dividends is identified as a driving force behind the strong long-term performance of REITs.

3. REIT Volatility and Diversification

The article discusses the volatility of dividend-paying stocks, measured by beta, and establishes that dividend payers, including most REITs, tend to be less volatile than the broader stock market. Lower volatility is further emphasized by the fact that the majority of REITs in the S&P 500 have betas of less than 1.0, indicating less volatility compared to the market. This lower volatility makes REITs an attractive option for investors looking to build a diversified portfolio with a balanced risk and return profile.

4. Performance of REIT Subgroups

The article delves into the performance of various REIT subgroups, showcasing how specific sectors have outperformed the S&P 500. Notable examples include self-storage REITs, which delivered annualized returns of 18.8% from 1994 to 2021, and infrastructure and data center REITs, which have outperformed the S&P 500 since Nareit started tracking them in 2012 and 2015, respectively. The data highlights the diversity within the REIT sector and the potential for attractive returns in specific subgroups.

5. Standout REIT Performers

The article identifies individual REITs that have consistently outperformed the market, such as Extra Space Storage, Prologis, and Realty Income. These REITs have demonstrated remarkable total annualized returns over various time periods, driven by factors like steady dividend growth, strategic acquisitions, and sector-specific dynamics.

In conclusion, the comprehensive analysis and data presented in the article make a strong case for the long-term outperformance of REITs compared to stocks, emphasizing the role of dividends and the potential for diversification within the REIT sector. Investors are encouraged to consider incorporating REITs into their portfolios for sustained wealth creation.

REITs vs. Stocks: What Does the Data Say? | The Motley Fool (2024)
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