A real estate investment trust is a company that owns or operates income-generating property in a range of sectors. REITs can be a great way to diversify your portfolio and earn solid dividends. However, they can also be volatile, so you’ll want to choose your REITs carefully and invest wisely.

REITs must meet several requirements in order to be considered publicly traded companies that pay dividends. For example, they must invest at least 75% of their assets in real estate and generate most of their revenue from rents or interest on mortgages financing real estate. They must also distribute at least 90% of their taxable profit to shareholders each year. REITs must be registered with the Securities and Exchange Commission (SEC) to trade on stock markets.

REITs can also raise funds privately through private placements, where investors purchase units in a REIT rather than buying shares of the REIT itself. Private REITs tend to be more illiquid than their public counterparts, meaning that it can take much longer to get your money back out of them.

When evaluating REITs, look for high quality properties that have strong tenants and solid management. The best REITs have a track record of steady performance and are likely to be around for the long haul. They should also offer competitive yields. A REIT’s yield is determined by its funds from operations, which subtracts depreciation from net income to calculate a company’s operating income.

You can find REITs that specialize in many different types of properties, including office buildings, retail space and multifamily apartments. Some REITs even specialize in sectors of the economy, such as medical and senior living. This allows you to tap into booming industries while diversifying your portfolio.

As a group, REITs have historically performed well, often beating the S&P 500 and other major indexes. But they can still suffer when the markets tank, especially if interest rates rise. That’s because REITs generate income by leasing property, and a higher interest rate means lower rental yields.

REIT returns are often affected by inflation, since they pay out a percentage of their earnings in the form of dividends. However, the income generated by REITs is taxed at the individual investor level instead of at the corporate level like traditional company stocks. This can be beneficial to investors who are in a lower tax bracket but still want to benefit from the real estate market’s solid dividend potential.

Before investing in REITs, be sure to speak with a trusted broker or financial advisor about your goals and risk tolerance. A reputable advisor should have access to REITs and other investments, as well as an understanding of how these assets can complement your overall portfolio. You can search NerdWallet’s list of top online brokers and robo-advisors for recommendations. Our ratings are based on over 15 factors, including account fees and minimums, investment choices, customer support and mobile app capabilities.