Why dividend matters
REITs such as EdR 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 rents paid by the tenants who occupy the properties. Rental rates usually rise during periods of inflation as 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.
As mentioned in the previous article, EdR’s (EDR) FFO increased to $1.80 per share in 2014 compared to $1.43 per share in 2013. Bolstered by higher FFO, the company increased its dividend by 9.5% to a total of $1.38 per common share in fiscal 2014 compared to $1.26 per share in 2013. This is the highest dividend paid by the company since 2009. With the dividend increase in the first three quarters of 2015 to $1.10, EdR is on course to pay around $1.47 per share this fiscal year.
FFO payout ratio
FFO payout ratio is the dividend declared per common share divided by diluted FFO per common share for a given period. FFO payout ratio provides investors relevant and useful information, as it measures the portion of FFO being declared as dividends to shareholders. EdR’s FFO payout ratio increased consecutively since 2010 to 2013. The FFO payout ratio was 57.8% in 2010, which increased to 87.8% in 2013. However, it declined to 76.2% in 2014.
EdR’s payout ratio is one of the highest in the industry. For example, AvalonBay Properties (AVB) offered an FFO payout ratio of 64%, followed by Essex Property Trust (ESS) at 62.15%, American Campus Communities (ACC) at 60.8%, and Equity Residential (EQR) at 60.7%. The SPDR DJ Wilshire Global Real Estate ETF (RWO) invests 0.20% of its portfolio in EdR.
We will discuss EdR’s debt position in the next article.