Why I Don't Own REITs: The Compounding Math Canadians Miss

When I started building my dividend portfolio in 2009, REITs were one of the first things I bought.

The logic was simple. Real estate generates rent. Rent generates income. The yield was high, the distributions arrived consistently, and the business model was easy to understand. What wasn't to like?

A few years in, I had my answer.

The distributions kept coming. The portfolio value barely moved. The yield was around 5%. Reinvested through DRIP, it felt productive — until I looked at what 5% actually meant for the timeline. At 5%, the Rule of 72 says it takes roughly 14 years to double your money. The historical return of the broad stock market runs around 8 to 10%. At 8%, you double in nine years. At 10%, you double in seven.

That gap doesn't feel dramatic in year one. Over a 25-year accumulation period, it's the difference between retiring when you planned and working five to ten years longer than you needed to.

I sold my REITs and never went back.

REITs hold real estate and distribute most of the income to unit holders. That structure is the appeal. It's also the constraint.

Growth in a REIT comes from four places:

→ Raising rents — difficult when large tenants sign long-term contracts, and restricted for residential tenants by regulations.

→ Reducing vacancy — already low across most categories, so there's little room to improve.

→ Acquiring new properties — slow, capital-intensive, and requires a consistent pipeline that is hard to maintain year after year.

→ Acquiring other REITs — possible, but not repeatable as a compounding engine.

None of those levers compound the way a software business or a dominant retailer compounds. The ceiling is structural, not cyclical.

For a REIT to deliver 10% annual dividend growth for a decade, everything has to go right, consistently, for ten years. Very few manage it. That's not a criticism of REITs as businesses — it's just an honest assessment of what the model can produce.

Dividend investing is about compounding. The yield is only part of the equation.

Total return combines capital appreciation with reinvested income. If the unit price of a REIT goes sideways for years while paying a 5% distribution, you are compounding at roughly 5%. That's better than a savings account. However, it does not make the REIT a compounding machine.

Compare two paths over 25 years on a $10,000 starting position:

→ 5% total return: grows to approximately $33,864

→ 12% total return: grows to approximately $170,001

The difference is not the yield. The difference is the growth rate of the underlying business.

During the accumulation years, the goal is to reach the largest possible portfolio. Income from that portfolio is a variable you apply later. Optimizing for yield before the portfolio is large enough is a mistake.

Some investors hold REITs specifically for real estate exposure. The reasoning is that real estate behaves differently from equities and adds diversification.

That's a reasonable theory. In practice, publicly traded REITs trade on a stock exchange, priced daily, and fall alongside the rest of the market during a selloff.

During the 2020 pandemic crash, REITs dropped with everything else. Some cut their distributions exactly when income was most needed. The defensive story broke down at the moment that story was supposed to matter.

If true diversification is the goal, owning the broad market — global equities across sectors — achieves more meaningful diversification than adding a real estate allocation to a portfolio already exposed to the market cycle.

Many of the largest Canadian REITs cut or suspended distributions during the pandemic. The investors who relied on that income as a stable, permanent stream discovered that REIT distributions are variable, not guaranteed. The pandemic was not an anomaly — it revealed how the model actually works under stress.

REITs become marginally more interesting in retirement, but they still carry a problem: the inflation test.

Retirement income needs to keep pace with inflation over 25 to 30 years. A distribution that grows at 2% to 3% per year while inflation runs at the same rate is not growth — it's stagnation.

Very few REITs increase their dividends annually. When they do, it’s mostly keeping up with inflation.

REITs fit in the risky yield category at best. A 7% yield that grows slowly and carries distribution risk is not the foundation of a retirement income strategy — it's a small, deliberate allocation, sized accordingly.

Covered call ETFs have become a more compelling income alternative than REITs for most Canadian investors.

A bank-focused covered call ETF on the Canadian majors — Royal Bank, TD, BMO, Scotiabank, CIBC, National Bank — gives you exposure to one of the most durable oligopolies in the country, with a higher yield than most REITs and better capital growth potential.

The Canadian banks have raised dividends through recessions, financial crises, and a global pandemic. That track record is difficult for any REIT to match.

The covered call structure caps some of the upside, but in retirement — where income consistency matters more than maximum appreciation — that trade-off is often worth making.

For income-seeking investors who feel the pull toward REITs, the question worth asking is: compared to what? If the benchmark is a diversified covered call ETF on Canadian banks or U.S. large caps, REITs rarely win on yield, growth, or stability.

Not all covered call ETFs are the same. Some have leveraged attached to them while others don’t. Leverage amplifies the income or the loss depending on which side of the market you are on. Retirement is not usually the time to invest with borrowed money.

The REIT Aristocrats in Canada — the subset that has consistently grown distributions — do not offer yields significantly higher than a well-constructed bank-focused covered call ETF. The income argument for REITs is weaker than it appears when you run the comparison. The business of REITs is just more understood.

REITs are not bad investments. They are the wrong investment for most of the accumulation years — and only marginally useful in retirement if better income tools are available.

The yield is real. The income arrives. The business model is easy to explain. All of that is true.

What is also true:

→ The growth ceiling is structural, not temporary

→ The compounding rate over time is lower than broad equity alternatives

→ The distributions are not guaranteed and have been cut during stress

→ Diversification through REITs does not protect you the way the theory suggests

→ Better income vehicles exist for retirement

I started with REITs because the yield looked like progress. What I was actually doing was trading compounding speed for the feeling of income. That is a trade most investors in the accumulation phase cannot afford to make.

The portfolio I have today was built by abandoning that trade early.

Remember why you invest, it’s to enjoy life and everything it has to offer. Don’t forget to treat yourself once in a while.

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