To The Moon

Growth stocks command a lot of attention from investors, and for a good reason. Fueled by expectations of future profits, they can and do create wealth at a pace unmatched by perhaps any other legitimate channel available to everyday investors. But that wealth can evaporate even more quickly.

Then, there are value stocks, those equities trading at less than they appear they should based on the company's underlying fundamentals. In volatile times, such as we're experiencing now, value stocks also can be hard hit by sellers bailing out despite those promising fundamentals.

Then, there are real estate investment trusts (REITs), which are in their own category as total return investments. REITs buy, sell, own, operate, and finance residential and commercial real estate. They must pass on 90% of their taxable income in the form of dividends, and in the process they can pass on the tax liability to their shareholders. They also must generate at least 75% of that income from rents, interest income, dividends from other REITs, and what they make selling real property.

That effectively makes the money put into a REIT a real estate investment as well as a stock investment. And real estate has a long history of being a buffer against the markets' vagaries, such as the correction we're seeing now.

The National Association of Real Estate Investment Trusts (Nareit) -- the big REIT trade group and data source -- says REITs have the lowest correlation with U.S. and global equity indexes among all classes of stocks when looking at monthly total returns from 2000 through 2020.

Easy access to thriving, inflation-resistant sectors

Buying REIT shares is a whole lot easier than buying real estate itself, especially if you're interested in, let's say, cell-phone towers, data centers or self-storage businesses. REITs are major players in those segments. Some other REITs own thousands of retail stores and others thousands of single-family rental homes. You can pick and choose the market you're interested in, and because of the reporting required of publicly held companies, you can examine the portfolios themselves to make your own judgment about their performance and potential.

Keep in mind that total return matters more in REIT investing than sheer price appreciation. They provide income, but they can't be expected to grow share price over the long run at anything close to the pace of a great growth stock.

Think of them as something more like a value stock with an income-generating feature that can make them a good alternative to bonds or cash for part of your portfolio. Especially since, with some simple research, you can find REITs that outperform the S&P 500 over the long run, as the chart below shows. (Prologis is a leading global provider of warehouse and logistics space.)

^SPX data by YCharts.

Although real estate can be an excellent hedge against inflation, some REITs operate in segments that may be particularly immune to inflation -- industrial REITs are a good example right now.

Nareit says REITs hold more than $3.5 trillion in gross assets nationwide. There are more than 1,100 in total, most privately held, but there are about 225 publicly traded REITs with a combined market capitalization north of $1 trillion.

A total return investment

A value stock can quickly become a growth stock and vice versa. But as long as a company remains a REIT (they can undo that structure, but that's rare), it will be a total return investment, offering a flow of passive income that can help ease the pain of falling share prices.

Add to that their liquidity, transparency, and ability to diversify a portfolio, and REITs can be a smart choice to consider now, in a rocky market with inflation and uncertainty both on the rise. Just remember, these are stocks, not real estate itself. With all that upside comes the risk that goes with owning any stock in any kind of market. But so does the potential reward.