Comparing REIT Yields With the S&P 500

Includes: VNQ, VOO
by: Eddy Elfenbein

Here's an example of how crazy markets can be.

I wanted to see an historical comparison of the dividend yields on REITs versus the yield on the S&P 500. REITs are real estate investment trusts. To keep their tax status, REITs have to pay out nearly all their income as dividends. As a result, REITs usually have high dividend yields.

I looked at the Vanguard REIT Index Fund (NYSEARCA:VNQ) as a proxy for the REIT sector (it's not perfect but it works for our purposes). I then looked at the trailing dividend yield and compared it with the Vanguard 500 Index Fund (NYSEARCA:VOO).

(Click to enlarge)

During the tech bubble when no one was interested in dividends, the REIT sector as a whole was offering yields of more than 8.5% while the S&P 500 was yielding less than 1.5%. That's insane but the conditions lasted for years. It took a massive real estate rally to push REIT yields below 5%, and even than took six years.

We've gone from one extreme to another. Only now does the yield difference look appropriate.

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