REITs for Dummies by Thomas Brad;

Author:Thomas, Brad; [Thomas, Brad]
Language: eng
Format: epub
Publisher: John Wiley & Sons, Incorporated
Published: 2023-09-07T00:00:00+00:00

Conservative and consistent dividends

Earlier I discuss how REITs are known for their dividends. That’s partially due to the inflationary nature of rents and property values, but much more so because they must pay out at least 90 percent of their taxable income to shareholders. As a result, REIT common equity, or regular stock, dividends tend to be higher as a percentage of free cash flow than those you’ll find from other companies. And REIT shares normally trade at higher dividend yields.

But here’s what you might not know. In general, according to Ned Davis Research, “companies that grew or initiated a dividend have experienced the highest returns relative to other stocks since 1973” and “with significantly less volatility.”

From 1973 to 2021, dividend income’s contribution to the S&P 500 Index’s total return averaged 40 percent. And REIT dividends can be even more effective, comprising more than half their respective stocks’ returns. From the early 1990s through 2022, U.S. REITs increased their payouts at a 6 percent average annual rate.

It's true that many REITs cut their dividend payouts in 2020 due to the economic shutdowns during the COVID-19 pandemic. However, as conditions — and cash flow — improved across nearly all property sectors, cash dividends made a strong comeback. And U.S. REITs should continue to see their income increase, which means their legal distribution rate remains above the level required by law. Combined, those two factors almost always force REITs to raise their dividends.

It’s freeing to see dividend checks hit your account every quarter or even every month, depending on the stock. Knowing that money is on its way regardless of whether you’re in the office or not is psychologically soothing, no matter whether you’re going to spend it right away or reinvest it.

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