Dividends

REITs’ reliable income returns have been one of the chief drivers in the industry’s performance. In 2008, for example, REITs paid investors approximately $17.8 billion in dividends.

By law, U.S. REITs are required to pay out at least 90 percent of taxable income to their shareholders in the form of dividends. Most REITs, however, opt to pay out 100 percent or more. Consequently, REITs tend to generate a stable and consistent income stream for investors.

In December 2008, the IRS issued important guidance that NAREIT had requested regarding the dividends paid deduction (DPD). Revenue Procedure 2008-68 permits a REIT to pay its dividend partly in stock as well as in cash while still qualifying for the DPD. The IRS ruling allows REITs to utilize a 10 percent minimum cash floor offer to shareholders for dividends declared with respect to taxable years ending on or before Dec. 31, 2009.

Data on average annual total returns from 1986 through 2008 illustrate the benefit of REITs’ steady income returns. While REIT stocks have exhibited clear potential for strong price appreciation, price returns can fluctuate from year to year. In contrast, REITs have yielded a consistent annual income component of 7.4 percent during that period, representing nearly 70 percent of the industry’s average annual total return of approximately 10.9 percent.

REITs’ steady dividends suggest that the securities are “inflation-proof” investments. A comparison of data from NAREIT and the Bureau of Labor Statistics reveals that annual REIT dividend growth has exceeded inflation as measured by the Consumer Price Index (CPI) every year since 1992. In fact, growth of equity REIT dividends outpaced CPI increases by a wide margin during that entire 16-year period except for one year, 2002. So far through 2008, REIT dividends have climbed nearly 6 percent, approximately twice the rate of CPI growth for the year.

 

  

This attribute of REITs’ investment performance takes on special significance for income-oriented investors, such as retirees, because a steady income source prevents the erosion of purchasing power. So long as these investors can bring in enough income from their investments to offset inflation, it ensures that they will be able to purchase the same amount of goods or services in the future as they can today.