Despite the modest pressure on REIT stocks in 2015 amid concerns regarding potentially higher interest rates, investors put $1.7 billion of fresh money into REIT ETFs, according to SSGA data. S&P Capital IQ thinks one of the appeals of a diversified approach to investing in REITS is their different asset class categories to mitigate risk in any one area of real estate and high cash flows to support dividends. During 2015, a wide array of REITs increased their dividends. The outlook for continued dividend increases in 2016 looks favorable to S&P Capital IQ aided by strong fundamentals.
According to SNL Financial, 140 North American real estate companies, 118 of those based in the U.S., boosted their dividend last year, two more than did in 2014. Indeed, 50 of these companies hiked dividends by 10% of higher and in certain cases, the growth was much stronger.
According to Christopher Hudgins of SNL, the largest increase last year was Ashford Hospitality Prime (NYSE:AHP). The small-cap hotel and resort REIT doubled its dividend in June 2015 and ended the year with a $0.40 per share annual dividend (3.8% current yield).
While such dividend growth should be providing some downside protection, AHP shares have been particularly volatile in recent months. Jake Mooney of SNL noted in early January that a significant investor in AHP called for a sale of the company in light of its discount to net asset value.
But some investors in large-cap REITs also received double-digit increases to cash payments last year. For example, Public Storage (NYSE:PSA), a specialized REIT, raised its dividend 21% in April 2015; PSA has a $43 billion market capitalization that grew during 2015 as the shares rose. PSA ended the year with a $6.80 per share annual dividend (2.7% yield). S&P Capital IQ noted that third quarter 2015 (latest available) occupancy rate at 95% and rent-per-square-foot growth was ahead of its peers. Funds from operation (FFO) are projected to rise 9% in 2016 according to S&P Capital IQ, providing ample room for a dividend increase.
Another large-cap REIT with double-digit dividend growth is Prologis (NYSE:PLD). In April 2015, the industrial REIT raised its dividend 11% to a $1.60 per share annual dividend (3.9% yield). S&P Capital IQ estimate 2015 FFO per share of $2.21 expanding 9.5% to $2.42 in 2016, driven by strong rate increases and the benefits of industrial property owner KTR Capital Partners transaction. S&P Capital IQ has a buy recommendation on PLD and sees the deal providing increased exposure to high quality e-commerce tenants.
Despite net inflows during 2015, investors did not treat all REIT ETFs equally. Vanguard REIT Index (NYSEARCA:VNQ), the largest ETF within the investment style with $27 billion, gathered $1.1 billion of fresh money according to etf.com data. Not that far behind with $674 million in inflows was Schwab US REIT (NYSEARCA:SCHH), even though the ETF had a smaller $1.9 billion asset base. In contrast, iShares US Real Estate (NYSEARCA:IYR) had $1.0 billion in outflows and now has $4.6 billion in assets.
Meanwhile, Simon Property Group (NYSE:SPG) raised its dividend 3% in 2015. S&P Capital IQ has a Buy recommendation on these shares and forecasts FFO to increase 8% in 2016 driven by improving retailer demand.
With a 0.43% expense ratio IYR was at least three times more expensive than VNQ and SCHH. However, with 3.9% dividend yields, IYR and VNQ both had higher income appeal than SCHH's 2.5% yield.
We think investors seeking dividend income should look at IYR, SCHH and VNQ since they provide exposure to REITs that are positioned for future dividend growth.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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