As we discussed earlier in this series, REITs like Equity Residential (EQR) must pay at least 90% of taxable income to investors as dividends. For REITs, dividends come primarily from the relatively stable and predictable stream of rent paid by the tenants who occupy the properties. Rental rates usually rise during periods of inflation. Many lease rates are tied to inflation. As a result, REIT dividends are protected, to a large extent, from the long-term effects of rising prices.
According to NARET, public-listed REITs like Simon Property Group (SPG) and Ventas (VTR) paid out ~$42 billion and public non-listed REITs paid out ~$4 billion in dividends during 2014. NARET data further shows that 68% of the annual dividends paid by REITs in 2014 qualify as ordinary taxable income, 13% qualify as a return of capital, and 19% qualify as long-term capital gains.
REIT yields are higher
The dividend yield is calculated as an annual dividend divided by the share price. REIT dividend yields can be compared to the yields of other asset classes to determine the relative value. As you can see in the above chart, REITs’ dividend yields are consistently higher than other asset classes. From 1995–1999, the dividend yield for REITs averaged more than 7% per year. This was much higher than 1.70% by the S&P 500 and 5.80% by the ten-year US Treasury note. During the housing crash, the dividend yield by REITs fell substantially. In 2006, the ten-year note performed better than REITs with a yield of 4.71%—compared to 4.06% for all REITs. In the past five years, the earnings yield of the S&P 500 is much better than the dividend yield of all the REITs.
Yields stabilized after the recession
By 2010 and 2011, many REITs that were affected by the recession started to streamline their operations. In the past six years, REIT yields have stabilized between 4% and 5%, while the S&P 500 is around 2%. Currently, REITs’ dividend yield is at 4.34%.
Investors looking for diversification in the REIT sector can get exposure to REIT ETFs like the Vanguard REIT ETF (VNQ), the iShares U.S. Real Estate ETF (IYR), and the iShares Cohen & Steers REIT ETF (ICF).