Real Estate Investment Trusts (REITs) provide a way to invest in real estate without directly owning properties. REITs are required to distribute at least 90% of their taxable income as dividends, which typically results in above-average yields compared to stocks. This makes them attractive for income-focused investors.

REIT total return comes from two sources: dividend income and price appreciation. When you reinvest dividends through a DRIP, you purchase additional shares that themselves generate more dividends, creating a compounding effect. Over long holding periods, DRIP can account for a substantial portion of your total return.

When evaluating REITs, investors should consider funds from operations (FFO), the payout ratio, property sector exposure, and interest rate sensitivity. REITs can be sensitive to rising rates because higher rates increase borrowing costs and make bond yields more competitive. Diversifying across sectors like residential, commercial, healthcare, and industrial REITs can help manage these risks.