REITs in a dividend portfolio: love them or avoid them? Here's my take after 8 years holding them.

REITs (Real Estate Investment Trusts) are divisive in dividend investing circles. The yields are attractive—often 4-7% for quality names—but they come with quirks that trip people up. Here's what I've learned from holding them since 2016.

Why I allocate about 15% to REITs:

Genuine diversification. Real estate fundamentals don't correlate perfectly with the broader stock market. During periods when my industrial stocks struggled, my apartment REITs held up because people still needed housing.

Inflation linkage. Rents tend to rise with inflation over time. My REIT income has grown faster than my consumer staples income over the past few years, partly because leases reset to market rates.

Required distributions. REITs must pay out 90% of taxable income to maintain their tax status. This isn't a choice—it's structural. You don't have to worry about management suddenly deciding to retain cash for acquisitions.

What I got wrong initially:

Treating all REITs the same. There's a massive difference between a net-lease REIT like Realty Income (tenants pay all expenses, very stable) and a hotel REIT (operationally intensive, cyclical). I learned this painfully during COVID when my retail and hotel REITs got crushed while my industrial and data centre REITs thrived.

Ignoring interest rate sensitivity. REITs are leveraged by nature. When interest rates rise, their borrowing costs increase and their valuations typically compress. The 2022-2023 rate hike cycle hammered REIT prices even when fundamentals were fine. If you're going to hold REITs, you need to be comfortable with this volatility.

Not accounting for the tax treatment. REIT dividends are mostly ordinary income, not qualified dividends. Depending on your tax situation, that 5% yield might net less than a 3% qualified yield. I now hold most of my REITs in tax-advantaged accounts.

The REIT types I favour:

Net lease (Realty Income, Agree Realty, NNN): Boring, predictable, long lease terms. Tenants are responsible for property expenses.

Industrial/logistics (Prologis, STAG): E-commerce tailwind, limited new supply in good locations.

Residential apartments (AvalonBay, Mid-America): People always need housing. Supply constraints in desirable metros.

What I avoid or underweight:

Retail (most of it): Structural challenges from e-commerce. Some grocery-anchored retail is fine, but malls are dying slowly.

Office: Work-from-home has permanently changed demand. The recovery thesis has been wrong for three years running.

Mortgage REITs: Not real estate—they're leveraged bond portfolios. Way more volatile and confusing than equity REITs.

Current state of my REIT holdings:

~15% of portfolio across 6 REITs. Average yield around 4.8%. I added during the 2022-2023 rate-driven selloff and those positions are up significantly. Plan to hold indefinitely unless individual thesis breaks.

Who else holds REITs? What's your experience been, and which specific names have worked for you?