What is a REIT? Definition, Formula, and Example
A REIT, or real estate investment trust, is a company that owns or finances income-producing real estate and is legally required to distribute at least 90% of its taxable income to shareholders as dividends.
What is a REIT?
A real estate investment trust (REIT) is a company that owns, operates, or finances income-producing real estate — office buildings, shopping centers, apartments, data centers, cell towers, warehouses, or mortgages on those properties — and trades as a publicly listed stock, letting retail investors buy a diversified slice of commercial real estate for the price of one share. REITs exist because of a specific tax structure created by Congress in 1960: in exchange for distributing at least 90% of taxable income to shareholders every year, a REIT pays no corporate income tax on the income it distributes, avoiding the double taxation that hits a normal corporation's dividends. That mandatory high payout is what makes REITs, as a sector, the highest-yielding major asset class in public equity markets.
How It's Calculated / Identified
To qualify as a REIT under the U.S. tax code, a company must meet several structural tests: at least 75% of assets must be in real estate, cash, or Treasuries; at least 75% of gross income must come from rents, mortgage interest, or property sales; and at least 90% of taxable income must be distributed as dividends annually. Because standard net income includes non-cash depreciation that understates a real estate company's actual cash flow, REIT profitability is measured with Funds From Operations (FFO) instead of EPS:
FFO = Net income + Depreciation & amortization − Gains on property sales
AFFO (Adjusted FFO) = FFO − Recurring capital expenditures − Straight-line rent adjustments
AFFO is the closer proxy for actual distributable cash and is what most dividend-coverage analysis is built on.
Worked Example
Realty Income (ticker O, self-branded "The Monthly Dividend Company") pays a monthly dividend of $0.271 per share — $3.25 annualized — against a stock price implying a dividend yield of roughly 5.3%. Management guided full-year FFO per share to $4.25-$4.27, and reported AFFO per share growth of 6.6% year-over-year in Q1 2026. Dividing the $3.25 annual dividend by $4.26 FFO per share gives an FFO payout ratio of about 76% — comfortably under 90%, indicating the dividend is covered with room to spare rather than being paid out of borrowed cash or asset sales.
When Traders Use It
Income-focused traders and investors use REITs as a substitute for or complement to bonds, since the mandatory payout structure produces yields well above the S&P 500 average. REITs are also a direct, liquid way to take a view on commercial real estate fundamentals and interest rates without buying physical property — REIT prices are highly sensitive to the direction of long-term rates, since higher rates both raise REITs' borrowing costs and make their dividend yields less attractive relative to Treasuries, which is why REIT sector performance tends to inversely track the yield curve and moves in the repo rate environment. Sector rotation traders also watch specific REIT subsectors — data center REITs for AI infrastructure exposure, industrial REITs for e-commerce logistics — as thematic proxies.
Limitations and Common Misconceptions
REIT dividends are not taxed like qualified stock dividends — the bulk of REIT distributions are taxed as ordinary income at the shareholder's marginal rate, which makes REITs comparatively tax-inefficient outside a retirement account. A high yield is also not automatically a safe yield: a stock price crash that outpaces a dividend cut can inflate the trailing yield figure, and some REITs pay out more than their AFFO can sustain, funding the gap with new debt or share issuance — a pattern worth checking against the FFO or AFFO payout ratio before assuming a REIT's yield is durable. Finally, REITs are equities, not bonds — despite the bond-like income framing, share prices carry full equity volatility and can fall 30-50% in a real estate downturn even as the dividend initially holds.