1 REIT That Should Be on Every Investor's Radar Plus 1 Promising REIT ETF

Investing in real estate can help take your portfolio to the next level. It increases your diversification and enables you to generate passive income, thereby enhancing your risk-adjusted returns. These qualities are why most financial advisors recommend that investors have some exposure to real estate investment trusts (REITs).

Here's one REIT that should be on every investor's radar and a promising REIT ETF to consider.

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Realty Income

Realty Income (NYSE: O) is the epitome of what a REIT should be. It owns a well-diversified portfolio of over 15,500 properties leased to nearly 1,650 tenants in 92 industries. It focuses on investing in properties secured by long-term net leases with the world's leading companies. Net leases provide it with very predictable and stable rental income because tenants cover all property operating costs, including routine maintenance, real estate taxes, and building insurance.

The REIT supports its high-quality portfolio with a rock-solid financial profile. It has a strong investment-grade credit rating and a conservative dividend payout ratio. That provides it with the financial flexibility to continue investing in income-producing properties during real estate downturns.

Realty Income's high-quality portfolio and financial profile have enabled it to pay an attractive and steadily rising monthly dividend. The REIT's payout currently yields over 5%. Meanwhile, Realty Income has increased its dividend for 113 consecutive quarters. This combination of income and growth has enabled the REIT to generate a 13.7% compound annual total return since its public market listing in 1994.

Schwab U.S. REIT ETF

The Schwab U.S. REIT ETF (NYSEMKT: SCHH) makes it easy to invest broadly in the REIT sector. It invests exclusively in REITs that own commercial real estate (excluding mortgage REITs). The ETF has a very low expense ratio (0.07%), making it a cost-effective way to passively invest in REITs.

While the fund currently holds over 120 REITs, it provides concentrated exposure to the largest REITs. Its top ten holdings -- which include Realty Income, its sixth-largest holding at 4.2% of its assets -- comprise nearly half of its net assets. However, it still provides broad diversification across the various REIT sectors, led by healthcare REITs at 16.6% of its holdings.

The Schwab U.S. REIT ETF also enables investors to generate passive income (its trailing 12-month dividend yield is 3%). While the ETF's distributions have fluctuated over the years, the payout has increased over the long term as the REITs it holds increase their dividend payments.

Two ways to add the benefits of REITs

Realty Income is one of the best REITs for investors seeking passive income and exposure to the sector. Meanwhile, the Schwab U.S. REIT ETF offers the same benefits with even greater diversification. Either option would be a great way to add some of the benefits of REITs to your portfolio.

Matt DiLallo has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool has a disclosure policy.