Why dividend matters
REITs like Simon Property Group (SPG) are required to pay at least 90% of taxable income to investors as dividends. For REITs, dividends come primarily from the relatively stable and predictable stream of rents paid by tenants who occupy their properties.
Rental rates usually rise during periods of inflation because 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.
Steady and consistent dividends
In 2014, Simon Property’s FFO (funds from operations) increased to $8.90 per share, a record for the company. Bolstered by its higher FFO, the company increased its dividend by 10.8% to a total of $5.15 per common share in fiscal 2014, compared to the $4.65 per share it offered shareholders in 2013—the highest dividend paid by the company since its inception.
With the $1.40 per share increase in dividends in 1Q15, Simon is now on course to pay at least $5.60 per share this fiscal year.
FFO payout ratio
A company’s FFO payout ratio is its dividend declared per common share divided by its diluted FFO per common share for a given period. The FFO payout ratio provides investors with relevant and useful information as it measures the portion of FFO being declared as dividends to shareholders.
It’s important to observe, then, that Simon Property’s FFO payout ratio, which was 58.7% in 2008, dropped to 50.7% in the subsequent year and remained in the range of 50.7%–52.5% until 2013. However, buoyed by its higher dividend, its FFO payout ratio rose to 57.9% in 2014.
Investors looking for exposure in commercial real estate can invest in REIT ETFs. Simon Property Group (SPG) and Public Storage (PSA) make up 8.16% and 4.06% of the Vanguard REIT ETF (VNQ), respectively. Equity Residential (EQR) comprised 6.70% of the iShares Cohen & Steers REIT ETF (ICF).
We’ll discuss Simon Property’s debt position in the next part of this series.