Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Dividend Stocks vs Real Estate Investment Trusts in July 2026
Transcript
- Lucas: So, we've talked a lot about dividend stocks versus bonds, especially with the 10-year Treasury now yielding 4.55 percent and the 30-year pushing past 5 percent. But there's another competitor for income investors' dollars that we haven't really touched yet: Real Estate Investment Trusts, or REITs. Luna: I've noticed that. And it feels timely because Realty Income — ticker O, that monthly dividend payer — is up 2.3 percent over the past five days while the S&P 500 is basically flat. Lucas: Right. And O just raised its dividend again — the 127th consecutive quarterly increase, I believe. The stock's at $63.23 as of this morning, yielding around 5.4 percent. That's nearly a full percentage point above the 30-year bond. Luna: Which is interesting because normally when rates rise, REITs are supposed to get crushed. They're interest-rate sensitive, they borrow a lot, and their dividends compete with bonds. But O has been holding up. Lucas: That's the puzzle we should unpack. Because if you're a dividend investor looking at your portfolio, you might be asking: should I own Johnson & Johnson yielding 3.2 percent, Coca-Cola yielding 3.1 percent, or a REIT like Realty Income yielding 5.4 percent? It's not a simple comparison. Luna: Before we go deep — and I know this is episode 100 for us — if you've found these conversations useful, especially when thinking through your own income portfolio, the way we keep this ad-free is through listener support. You can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, exactly. It's a small way to keep the lights on and the research flowing. So, back to REITs. Let's start with the obvious difference: tax treatment. Luna: Right. REIT dividends are mostly non-qualified. They're taxed as ordinary income, not at the lower capital gains rate. If you're in a high tax bracket, that 5.4 percent yield might be closer to 4 percent after taxes, while J&J's 3.2 percent might only lose 15 percent to taxes. Lucas: Which narrows the gap significantly. But that doesn't mean REITs are a bad fit — it means they're best held in tax-advantaged accounts like an IRA or 401. That's where the full yield compounds without the tax drag. Luna: And the mechanics of the payout are different too. REITs are required by law to distribute at least 90 percent of their taxable income. So that dividend is more directly tied to the underlying property cash flows. Lucas: Exactly. Realty Income owns over 15,000 properties, mostly single-tenant commercial — Walgreens, Dollar General, FedEx. They're triple-net leases, meaning the tenant pays property taxes, insurance, maintenance. So the rent is relatively stable, and the dividend has grown for 30 years straight. Luna: But there's sector concentration risk. A lot of their tenants are in retail and warehouse — you don't get the diversification of an S&P 500 dividend ETF. Lucas: That's the trade-off. With a stock like J&J, you have pharma, medical devices, consumer health — three very different revenue streams. With a REIT, you're betting on real estate fundamentals. Right now, the market seems to be saying those fundamentals are solid. Luna: And the yield spread to Treasuries is actually quite wide historically. If you look at the 30-year at 5.05 percent and Realty Income at 5.4 percent, that's only 35 basis points of spread. But REITs have grown their dividends over time, while bond coupons are fixed. Lucas: That growth is the key argument. Johnson & Johnson has increased its dividend for 63 consecutive years. Coke for 63 years too. Realty Income has raised for 30 years. All three have compounding power, but the starting yield on the REIT is much higher. Luna: So if you're a retiree needing cash flow now, maybe the REIT gives you more upfront. If you're younger and reinvesting dividends, the growth stocks might win over decades. Lucas: Right. And there's another factor: duration. Bonds have a fixed maturity — their price sensitivity to rates is predictable. REITs are perpetual, so they're more like equities. Their price can bounce back as rents grow, whereas a bond's price only recovers as it approaches maturity. Luna: Which is why we've seen O up this week even as rates rose. The 10-year went from 4.48 to 4.55, and O gained 2.3 percent. That suggests investors are looking through the rate noise to the underlying rent growth. Lucas: And compare that to a utility stock or a consumer staple — those can get hit harder when rates rise because their earnings are more exposed to inflation and borrowing costs. REITs have some natural inflation hedging built in, since leases often have escalators. Luna: But not all REITs are created equal. You've got office REITs struggling with work-from-home, mall REITs under pressure, and then data center REITs booming. Realty Income is fairly conservative, but it's not immune to a recession. Lucas: No, and that's why we should look at the payout ratio. For REITs, payout ratio is measured as dividends per share divided by funds from operations, or FFO, not earnings. Realty Income's payout ratio is around 75 percent of FFO — sustainable, but not a huge cushion. Luna: Compare that to J&J, which pays out about 60 percent of earnings. And J&J has a fortress balance sheet — triple-A rated, actually, though I think it's now AA? Either way, very low debt. Lucas: Johnson & Johnson carries about 25 percent debt to total capital. Realty Income is more like 40 percent debt, which is typical for a REIT. That leverage amplifies both returns and risk. Luna: So for a dividend investor, the choice depends on your tax situation, your time horizon, and your risk tolerance. If you need income now and have tax-advantaged space, a REIT like O can be a great tool. If you're building long-term wealth, maybe go with the dividend growers. Lucas: And you don't have to pick just one. A blended portfolio might hold J&J, Coke, and Realty Income. The key is understanding what each brings. The REIT gives high current yield with property exposure. The dividend aristocrats give lower starting yield but more consistent growth and lower volatility. Luna: One thing that's interesting this week: the Russell 2000, which has a lot of small-cap REITs, is down nearly 2 percent. So there's a flight to quality within real estate too. Big, well-capitalized REITs like O are winning. Lucas: That's consistent with the overall market. The S&P 500 is basically flat, the Dow is slightly up, but the small caps are getting hit. It's a risk-off move, and within REITs, investors are flocking to the names with strong balance sheets and long track records. Luna: And that's where the dividend growth matters. Realty Income has increased its dividend for 30 years, including through 2008 and 2020. That gives investors confidence that the payout will hold up. Lucas: Exactly. So as you're building your income portfolio in this environment — with the Fed split on rates, the 10-year at 4.55 — don't overlook REITs as an income source. Just be mindful of the tax treatment and the sector concentration. Luna: And maybe check the payout ratio and the debt levels, because not every REIT is Realty Income. But for those that are, they can be a solid complement to traditional dividend stocks. Lucas: Right. And on that note, we've hit 100 episodes. Thanks for sticking with us. We'll keep digging into specific ideas so you have the tools to make your own calls. Luna: See you next time.