Investors seeking a predictable source of income should consider a dividend investing strategy. Dividend payments are made to shareholders when a publicly traded company earns a profit and decides to allocate some of these funds to their shareholders. Individual investors often refer to total return statistics without realizing how much of an impact dividends have on total return. For example, over the past 10 years, the S&P 500 returned 191% without dividends and 261% including dividend payments.
Not every company offers dividends – some companies prefer to channel their profits into retained earnings to fund research and development, mergers or acquisitions, capital expansion or reinvestment in their workforce. Some companies only pay dividends to shareholders that meet specific qualifications or own a certain class of stock. Dividends are not standardized by amount or distribution schedule, and they are often postponed or cancelled if the company is operating at a loss.
Real Estate Investment Trusts (REITs) are companies which generate revenue from owning, financing or operating real estate. For investors considering a dividend strategy, REITs are especially interesting because they often pay significant and stable dividends. REITs are exempt from corporate taxes because they are required to distribute at least 90% of their net earnings to shareholders as dividends.
As an example, Agree Realty (NYSE:ADC) currently pays a 4% dividend yield versus an average of 1.4% by companies in the S&P 500. Agree recently changed its dividend payment structure to monthly (from quarterly) to join a handful of REITs such as Realty Income (NYSE:O) and LTC Properties (NYSE:LTC) which feature the benefit of a monthly payment. S&P 500 index funds keep with tradition, making quarterly payments. The benefit of monthly payments is more regular cash flow for investors.In this example, Agree Realty is paying a dividend more regularly and 171% higher than S&P 500 stocks.
Institutional investors have championed REITs as a core asset of their investment strategies – many pension plan sponsors, endowments and foundations have used this dividend investment strategy successfully. Pension funds typically allocate 15-20% of assets in real estate holdings and real estate has been the second largest contributor to performance over the past 20 years. (SOURCE: CEM Benchmarking).
REITs are also viewed by many stock analysts as an attractive investment vehicle during periods of low interest rates. Considering the Federal Reserve has made it clear that rates will be remaining at historic lows for the foreseeable future, REITs are now enjoying a high level of popularity.
Long-haul investors who are seeking a steady income stream could benefit from the intelligent pursuit of dividend investing and REITs should be high on the list for consideration.