If you want to invest in real estate, but are discouraged by high illiquidity or capital requirements, REITs can be a great opportunity to diversify your portfolio. There are many additional advantages of Real Estate Investment Trusts, one of them being the consistent stream of income from rents.
It is important to understand how REIT dividends work before investing in these funds, as they function differently from stocks or ETFs. Find out how these dividends are paid and how they compare to other types of assets.
How REIT Dividends Work
In the United States, REITs (Real Estate Investment Trusts) are required by law to provide their shareholders with a steady stream of income in the form of dividends. Specifically, they must distribute at least 90% of their earnings on an annual basis. This taxable income, which is generated from real estate investments, can be used to offset the REIT’s corporate taxes. Therefore, many REITs choose to distribute more than the minimum requirement, often 100% of their earnings, to avoid owing any corporate taxes.
How Often are REIT Dividends Paid?
According to the SEC, REITs are required to distribute dividends at least once a year. While some of these investment companies stick to the annual payout schedule, many provide dividends on a quarterly or even monthly basis.
Quarterly Dividend REITs
Monthly Dividend REITs
Can REIT Dividends be Reinvested?
There are some REITs that have reinvestment plans, so it is possible to buy new shares from distributions automatically. While this is a good opportunity to expand your portfolio, it is important to understand your local tax laws on REIT investment. In the US for example, the reinvestment plan does not exclude you from paying taxes on the dividends.
How REIT Yields are Calculated
If you want to calculate the annual return from investing in a REIT, you need to do the following steps. First, you need to take the sum of all distributed dividends per share over the entire year. It is important that you only take the distribution for each share. The next step is to divide this number by the current share price of the REIT and then multiply the number times 100. This will give you the annual yield, which can help to compare one REIT to another in terms of return.
REIT Yield Formula: Dividend Yield = Annual Dividend per Share / Current Share Price * 100
Highest Dividend REITs
Overall, the best-performing REIT sectors in 2022 were self-storage, industrial, and timber. These have shown the highest growth in returns throughout the year. When it comes to the overall dividend distribution, healthcare is first with a yield of 4.60%, followed by self-storage with 3.13% and multifamily with 2.83%. On average, all US REITs have a yield of 3.24%.
Some examples of highest-paying REITs are the following (value shows annual yield):
- 25.21% – Armour Residential REIT Inc.
- 16.29% – PennyMac Mortgage Investment Trust
- 15.59% – Chimera Investment Corp.
- 14.74% – Apollo Commercial Real Estate Finance Inc.
There are many REITs that have great returns, even in excess of 20% annual yield. Before investing in these companies you must analyse the structure of the fund very precisely. High yields are usually related to higher risk, compared to other options.
To understand how REIT dividends work, it is crucial to know what kind of properties the company invests in and how this sector is currently performing.
REIT Dividends vs Other Asset Types
To provide a better overview of how REIT dividends work, it can be insightful to compare them to other asset types. Since real estate investment trusts differ between the types of properties, they also have differences in their annual return and overall performance as explained previously.
REITs have outperformed other stocks to an extent within the last decades. This can be seen when comparing them to the S&P 500 for example. In the last 20 years, REITs had a 12.7% average annual return, while the S&P 500 had a return of 9.5%. On the other hand, within the last 5 years, their return was 13.5% and 18.5% for the S&P 500.
Due to these results, it is necessary to take a look at the particular subgroups of REITs. The following bullet points show the average annual return for each type of them:
- Self-Storage 18.8%
- Industrial 15.8%
- Residential 14.4%
- Health Care 12.7%
- Office 12.1%
- Retail 12.1%
In 2021, REITs had an average return of 41.3% but fell to -24.4% in 2022. While this decrease was quite substantial, many other asset classes like small-cap or emerging market stocks, haven’t performed well either last year.
Overall, they are still the asset class with the third-highest overall return, only beaten by large-cap and small-cap stocks within the past 15 years.
Investing in REITs can be a good opportunity to diversify your portfolio, without having to manage properties directly. In order to have a great performance, it is crucial to understand how REIT dividends work. These investment companies must distribute at least 90% of their income in the form of dividends, while most of them pay even more due to tax benefits. In the US, these dividends are taxed, even if they are reinvested automatically. Depending on the type of REIT, they can deliver great returns compared to other asset classes.
If you want to learn more about the future of commercial real estate, including topics such as sustainability & ESG, PropTech, architecture, development and investment, feel free to take a look at our other articles on Smart CRE. Here you will also find insights into the job market and how to start a career in real estate.
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