A. There are three major differences between a REIT and a stock or a mutual fund:
1) No Taxation for REITs
There is a double taxation for individual investors who receive dividends from public companies (companies pay corporate tax first for their earnings, then individual investors pay income tax on dividends received).
For REITs, they generally pay no corporate taxes.
2) High Payouts for REITs
REITs by law must distribute at least 90% of their taxable income as dividends to shareholders in order to avoid paying corporate income taxes.
3) Income Sources
REITs must derive at least 75% of their income from property, such as from rents or from gains on the sale of property, and must hold at least 75% of assets in real estate and cash.
Some good REITs include Fidelity Real Estate (FRIFX), Vanguard REIT Index (VNQ and VGSIX).