What is a defining feature of Real Estate Investment Trusts (REITs)?

Real Estate Investment Trusts (REITs) are required to distribute a significant portion of their profits back to shareholders in the form of dividends, which is a defining feature of their structure. Specifically, they must pay out at least 90% of their taxable income as dividends to qualify for favorable tax treatment under the Internal Revenue Code. This requirement is designed to ensure that REITs operate primarily as investment vehicles for income generation for their shareholders rather than retaining most of their earnings for growth.

This focus on income makes REITs particularly appealing to investors looking for regular dividend income, linking the performance of the trust directly to the performance of the underlying real estate investments. The requirement has led many REITs to maintain a portfolio of varied properties, seeking to enhance both income and potential capital appreciation.

The other options do not accurately represent the defining features of REITs. While payout ratios are critical, a full 100% payout is not required, as REITs can retain some earnings for growth (which is why option A is incorrect). REITs invest in a variety of properties, including residential, commercial, industrial, and more, making option B inaccurate. Similarly, the investment scope of REITs is not limited to residential properties only