REITS, or Real Estate Investment Trusts, must be included in every Dividend Investor’s portfolio. Not only do they help reduce your portfolio’s volatility, they also provide great dividend yields and income streams for reinvestment or to help with living expenses.

Surprisingly, we came to a few counter-intuitive conclusions as we looked at the total universe of 320 REITs available on US exchanges. Here’s what we found out:

As dividend yield increases, total return decreases

While we all want more dividends, in fact the higher the yield goes, the lower total return is delivered. This fact shows the folly that is the pursuit of high yields. They are unsustainable and lead to a lower return on your investment, as compared to lower yielding REITS. It seems that the total return maxes out at yields of around 3.8%.

As price to earnings ratio increases, so does yield

PE is a measure of how much people are willing to pay for a dollar of earnings. It’s a great way to grossly compare the relative prices of stocks. Some people like to pay a high premium for high yield, as high-yielding REIT stocks tend to have higher PE ratios. Unfortunately, as we learned above, as yield increases, and the price you pay for that high yield increases, the quality of the stock and the reliability of the company decreases, and so does the total return.

Dividend Aristocrats and Kings don’t provide the highest total returns

We LOVE our stocks that have built up records of paying increasing dividends, as they are the backbone of our portfolios. Nevertheless, the total return offered by REITS that pay increasing dividends tends to peak around 16.5% annualized total return in between the 10th and 15th year of paying increasing dividends. From there the total return declines to to an average of 13.5% around the 20th year. It’s an example of “reversion to the mean” in process. Even so, I’m not going to complain about a 13.5% annualized return!

Summary

  • Be wary of REITS with yields above 4%! The total return they offer may merely be the yield alone, which is much lower than the what the market traditionally delivers over time (9%)
  • Paying more for a high yielding REIT (above 4%) with a high PE ratio isn’t likely to achieve a higher total return versus lower yielding REITS with more affordable (sane?) PE ratios
  • Longevity in delivering increasing dividends may mean the REIT has exceptional properties, in great locations, and is well-run. But longevity may not mean that REIT will offer you the highest total return, but you will be able to sleep at night!

What are YOUR thoughts?

Would love to hear from you!