REITs Dividends: A Smart Strategy for Passive Income
Introduction
Reit stands for Real Estate Investment Trusts are a simple way through which investors can potentially earn high returns through dividends while investing in the real estate market. Unlike conventional property investments where investors have to make direct investment on properties and manage the same, REITs provide for share ownership in property portfolios that generate rental income.
The biggest feature of REITs is high dividend yields. Since legally they are mandated to distribute more than 90% of their taxable income to shareholders, REITs form an appealing investment for investors seeking dividend carriers.
In this piece of the brief, we shall discover:
How REIT dividends work
Types of REITs and their dividend potential
Best REITs for dividends
How to evaluate REIT dividend safety
Tax implications of REIT dividends
To illustrate the advantages and disadvantages of investing in REITs for the purpose of reaping high dividends, the following are provided:
1. How REIT Dividends Work
What Makes REIT Dividends Unique?
REITs work almost like real estate mutual funds where the investors contribute their money in order to invest on properties including:
Residential apartments
Office buildings
Shopping malls
Warehouses and industrial properties
Healthcare facilities
This is because most of the income obtained by REITs is generated through rental revenue hence they have a good cash flow that is used in distribution of dividends. Compared to the regular dividend paying stocks, REIT stocks are legally required to distribute 90 per cent of their taxed profits.
Frequency of Dividends Paid by REITs
The majority of the companies in the REIT industry, as is the case with most industries, pay dividends on a quarterly basis; however, there are those that pay dividends on a monthly basis which makes them more appealing to investors who are in particular looking for steady income.
2. Types of REITs and Their Dividend Potential
There are five various classes of REITs based on risk and returns; Dividend yield is the annual return on the price of a REIT.
A. Equity REITs (Highest Dividend Payouts)
Own and operate real estates such as apartments, office, retail spaces, etc.
To draw more and more people towards property investment, they generate income through rent payments and hence their dividends are more or less predictable.
Examples: Realty Income (O), Simon Property Group (SPG), AvalonBay Communities (AVB).
B. Mortgage REITs (mREITs) (Highest Yields but Higher Risk)
Venture in mortgage and mortgage backed securities instead of going for real estate.
Them are as follows; Ability to be more sensitive to interest rate changes which consequently affects its dividends.
They offer higher interest rates compared to savings accounts ranging between 8% to 12% for most of them though they are associated with more risk.
Examples: Annaly Capital Management (NLY), AGNC Investment Corp (AGNC).
C. Hybrid REITs (Balanced Dividend and Growth Potential)
Mortgages and properties are among its specializations, in which there is both conservative and high income.
Examples: New York Mortgage Trust (NYMT), Starwood Property Trust (STWD).
D. Specialized REITs — these are quite unique dividend opportunities.
Policymakers should focus on the specialization in health care, data centers, infrastructures, and storages.
Are likely to have long-term occupancy of its properties, making their revenues foreseeable.
Examples:
Healthcare REITs – Welltower (WELL), Ventas (VTR)
Data Center REITs – Digital Realty Trust (DLR), Equinix (EQIX)
Infrastructure REITs – American Tower (AMT), Crown Castle (CCI)
3. Best REITs for Dividend Income
Below are some of the most popular high-yielding REITs as follows:
1. Realty Income (O) – “The Monthly Dividend Company”
Dividend Yield: ~5%
Payout Frequency: Monthly
Why Invest? Realty Income has paid dividends for over 50 years, which proves the reliability of the company’s incomes.
2. Simon Property Group (SPG) – High-Yield Retail REIT
Dividend Yield: ~6%
Why Invest? Currently the largest mall owner in the U.S. Its business is positively affected by healthy consumer spending.
3. Annaly Capital Management (NLY) – High-Yield Mortgage REIT
Dividend Yield: ~12%
Why Invest? This post has one of the highest yields but only at the expense of high risk flips /volatility.
4. Digital Realty Trust (DLR) – Data Center REIT
Dividend Yield: ~4%
Why Invest? Availability of cloud solutions and artificial intelligence in future makes data center REITs as an even better investment for future dividends.
5. Welltower (WELL) – Healthcare REIT with Steady Growth
Dividend Yield: ~3.5%
Why Invest? Increasing population of the aging-demographic enhances the demand of housing for the elderly and health structures.
4. How to Evaluate REIT Dividend Safety
Before entering into any kind of investment in any REIT, it is noble to measure its dividend safety.
A. Funds from Operations (FFO) and Adjusted Funds from Operations (AFFO)
This is entirely different from other stocks since REITs employ FFO and AFFO in tallying their profit rather than EPS.
Formula:
FFO = Net Income + Depreciation + Amortization - Gains on Property Sales
AFFO = FFO - Capital Expenditures
A relative FFO/AFFO to the dividends paying capacity is always higher in the case of a REIT that has sustainable payouts.
B. Dividend Payout Ratio
Dividend Payout is used to determine the Distribution of Earnings: Dividend Payout Ratio = Dividend Dividend Paid / FFO
The World’s average payout ratio should not exceed 80% in order to maintain the balance.
C. Debt Levels (Leverage Ratio)
It is always unadvisable to have lot of debts since high interest rates can be tricky to grin .
Also it is desirable to check the Debt to Equity ratio: the figure the lower, the better.
5. Tax Implications of REIT Dividends
REIT dividends have a unique taxation system that is different from that of other stock dividends.
A. Ordinary Dividends (Highest Taxed)
Most REIT dividends are levied at normal income tax rates which range from 10% to 37% depending with the tax addition of the country.
The next common topic, qualified dividends, also known as dividends receiving a lower tax rate, is also confusing.
A maximum of 80% of REIT dividends may attract corporate taxes where some falls under capital gains taxes (0-20%).
C. Return of Capital (ROC) (Tax-Deferred)
Some of the REIT dividends are actual return of capital, which actually shrinks your basis in the stock and the dividends you receive does not immediately trigger taxation.
D. Best Accounts for Holding REITs
Good for Wealthier Investors: It would be best to buy REITs and hold them in Roth IRA or 401(k) to minimize taxes.
For taxable accounts, it is preferred to go to a taxable account where you should look for REITs with additional qualified dividends or return of capital.
6. Pros and Cons of Investing in REITs for Dividends
Pros
✓ High Dividend Pg: 219 As investors, we are aware that REITs rank among the best stocks as far as paying huge dividends is concerned.
✔ Passive Income – Does not involve management of other people’s property to gain returns which are in form of dividend.
✔ Diversification – An easy and convenient method to invest in real estate without purchasing the property.
✔ Inflation Hedge – rental of real estate also tends to follow the rising inflation trends.
Cons
❌ Tax Disadvantages – The dividend yielded by a REIT is usually taxed more than the ordinary income tax.
❌ Interest Rate Sensitivity – REIT stock prices are negatively correlated with the interest rates in a manner that when interest rates rise so does the relative price of REIT stocks.
❌ Market Volatility – Like most equity investments, some REIT investments especially mREITs, oscillate violently in terms of price movements.
❌ High Dependency on Debt : Many REITs depend on debt, which is never a good situation during adverse conditions.
Conclusion
REITs dividends are an excellent way to earn passive income, diversify your portfolio, and benefit from real estate appreciation without owning property. An important characteristic of REITs is that they usually provide high and also steady dividend stock, and long-term capital appreciation.
For the best results and maximum income, pay attention to such criteria as high coefficients of pay, low levels of debt, and the steady FFO increase. Also, make the use of accounts that have low tax consequences such as Individual Retirement Accounts IRA in order to minimize tax impacts.
If you are interested in constructing div-dend investing strategy with REITs?
Start investing right now and increase your capital properly with dividends from real estate!
