I’m trying to build a $40k dividend portfolio and want to know if REITs make sense for me

For many people, living off of passive income is truly the dream. And it’s something this Reddit poster is clearly interested in.

Here, we have someone who’s looking to build a portfolio that generates $40,000 a year in income. They’re thinking of loading up on REITs, or real estate investment trusts, and they’re wondering if their income goal is realistic.

REITs are companies that own portfolios of real estate. They make money by leasing out those properties.

It may be possible to generate $40,000 a year in dividends with a REIT-heavy portfolio. But that doesn’t mean it’s the smartest move.

The danger of going all-in on REITs

In theory, a portfolio of REITs could pay you $40,000 a year — if you have enough money.

It’s not uncommon for REITs to generate 4% dividend yields, since they’re required to pay out at least 90% of their taxable income as dividends. In fact, REITs tend to outperform other stocks on the basis of dividends alone.

If you have $1 million to invest in a REIT portfolio with a 4% dividend yield, then you may be looking at $40,000 a year in income. However, there are a few caveats to keep in mind.

First, a REIT, like any other stock, can cut its dividend at any time. So the dividend yields you start out with may not be the yields you continue enjoying.

More so than that, it’s rarely a good idea to put all of your assets into a single segment of the market. If there’s a real estate crash, it could drive the value of certain REITs down (others may be more protected).

But generally speaking, it’s not the best idea to build a portfolio solely with REITs. If your dividend payments start to shrink and your REITs themselves lose value, you could be in for a serious financial shock.

Aim for a better asset mix

Another issue you might have with a REIT-heavy portfolio is that the value of your assets may not increase very much through the years. That’s why you may want to build a portfolio that consists of REITs for the dividend income, but also growth stocks.

Companies that pay large dividends don’t tend to experience the same level of growth as companies with smaller or no dividends. There can be exceptions, of course. But you may want to aim for a more balanced portfolio than one that’s concentrated on a single asset class like the poster suggests.

Also, if your goal is to generate passive income, you may want to put some money into assets that may be more stable than REITs, like bonds. Treasuries or municipal bonds could be smart assets to load up on to some degree, depending on how much or little risk you want to take on.

It pays to get outside help

There’s nothing wrong with wanting your portfolio to produce a certain amount of passive income. But rather than roll the dice, you may want to sit down with a financial advisor and work together on strategies to get there.

A financial advisor can take a look at your income goals to help you put together a portfolio that works for you. They can also explain the pros and cons of different investments so you know what to expect.

Contact [email protected] for any questions or corrections.