The Ultimate Guide to REITs: Strategies to Buy, Hold, and Profit

REITs are known for paying dividends. The IRS requires that REITs wage a minimum of 90% of their taxable income successful dividends to support their taxation advantages (REITs don't wage firm income taxes).

Dividend payments assistance springiness REITs an vantage successful producing returns for investors. Over the past 50 years, companies successful the S&P 500 (SNPINDEX: ^GSPC) that paid dividends person delivered much than treble the full returns arsenic non-dividend stocks, according to information from Ned Davis Research and Hartford Funds (9.2% annualized full instrumentality versus 4.3%). Overall, dividends person contributed astir 50% of REIT returns implicit the agelong word (that compares to astir 34% of the S&P 500's full instrumentality since 1940).

However, there's a sizeable quality successful returns by dividend policy:

Data source: Ned Davis Research and Hartford Funds.

Given that data, the champion mode to nett from dividend stocks similar REITs is to put successful those that consistently grow their dividends. Three factors thin to thrust a REIT's quality to summation its dividend:

1. The prime of its portfolio: The REIT needs to ain a high-quality portfolio of properties that nutrient durable and increasing rental income. It should ain properties benefiting from expanding demand, leased to a divers acceptable of high-quality tenants.

2. The dividend payout ratio: While REITs indispensable administer 90% of their taxable nett income, they typically nutrient much currency travel than income owed to depreciation. Because of that, a amended gauge of dividend information is the percent of a REIT's funds from operations (FFO) it pays successful dividends. Ideally, a REIT should person a payout ratio of 75% of its FFO oregon less. That gives it a cushion portion allowing it to clasp immoderate currency to money caller investments.

3. The equilibrium sheet: REITs get a batch of wealth to money acquisitions and improvement projects. This means they indispensable support a beardown equilibrium expanse to proceed growing. A REIT should person an investment-grade bond rating backed by debased leverage ratios (ideally beneath 5.5 times indebtedness to income).