In my last Seeking Alpha article, Defend Your Portfolio With These 'Wide Moat' REITs, I detailed several 'wide moat' REITs that have performed extraordinarily better by defending against highly competitive forces - notably the great recession. By protecting these differentiated revenue streams, these iconic "fortresses" (REITs) have proven to be more durable in defending against principal losses while growing a competitive dividend advantage.
The "fortress" REITs with the largest economic moats provide a more defensive component that defines the REIT's competitive positioning and protects from its closest rivals. By examining the revenue streams (and dividends), an investor is able to select companies with rising dividends and evaluate possible entry opportunities for future "fortress" brands.
Forecasting a Wide Moat Model
Traditionally, REIT investors have been attracted to REITs, in substantial part, for their stable and gently rising dividends, and a significant dividend yield remains important to most real estate investors. However, in a credit crisis (like the US endured in the late 1980's and more recently in 2008-2009), many REIT boards opted to cut or temporarily suspend dividends to preserve capital.
The "wider moat" REITs (as referenced in my previous article) with lower leverage levels were able to mitigate risk and maintain and/or grow dividends. Conversely, these fortress (latin: smart) brands are known to be more adept an intelligently bearing risk for profit. As Ben Graham, the author of The Intelligent Investor explained:
The defensive investor must confine himself to the shares of important companies with a long record of profitable operations and in strong financial condition
Graham was adamant about investing in companies that pay dividends. He believed that conservative investors should only consider companies that have paid a dividend every year for many years. He argued that dividends are a sign that a company is profitable and that they also offer investors a return even if the company's stock does not perform well.
Graham also looked for companies with steady, rising earnings trends. He believed that steadily improving earnings would lead to improved share price performance - results accomplished through identifying quality dividend growth companies at attractive valuations.
REITs Building Moats in 2012
As reported by SNL Financial writer Bhaumik Baxi, "North American real estate companies continue to keep a strong pace for dividend increases in 2012, following a solid track record in 2011." Year to date (thru June 5, 2012), SNL reports that five Canadian REITs and 48 U.S. REITs have increased dividends so far this year and the multifamily sector has had the most number of REITs increase payouts.
Eleven multifamily REITS have raised dividends (since June 5th) and that represents 20.8 percent of the total REIT sector.
Eight hotel REITs have raised dividends (since June 5th) and that represents 15.1 percent of the total REIT sector.
Six health care REITs have raised dividends (since June 5th) and that represents 11.3 percent of the total REIT sector.
Five regional mall REITs have raised dividends (since June 5th) and that represents 9.4 percent of the total REIT sector.
Five diversified REITs have raised dividends (since June 5th) and that represents 9.4 percent of the total REIT sector.
Four shopping center REITs have raised dividends (since June 5th) and that represents 7.5 percent of the total REIT sector.
Four other retail REITs have raised dividends (since June 5th) and that represents 7.5 percent of the total REIT sector.
The following ten REITs also raised dividends (since June 5th) as represented by sub-sectors specialty, self-storage, industrial, office, and manufactured home.
So Why Does an Intelligent REIT Investor Look for Moats?
In recent years, over half of total returns from REIT investments have come from the dividends alone. That important factor is the primary reason that REITs are differentiated from the broader equities paying lower yields. More importantly, the relative stability and visibility of REITs underlying cash flows make these defensive assets a most desirable asset sector.
By researching shares in REITs with enhanced dividend safety fundamentals, an investor is more likely to recognize risk - an essential element for controlling it - and gain broader advantage towards overall portfolio diversification. In simple terms, owning a diverse portfolio of "wide moat" stocks will enhance your revenue streams and provide you with enduring consistency and reliability - the mark of a fortress (smart) REIT investor.
The following REITs increased dividends so far (since June 5th) this year: (NYSE:PPS), (NYSE:CPT), (NYSE:ESS), (NYSE:AIV), (NYSE:AEC), (NYSE:BRE), (NYSE:HME), (NYSE:UDR), (NYSEMKT:APTS), (NYSE:AVB), (NYSE:CLP), (NYSE:CLDT), (NASDAQ:MAR), (NYSE:LHO), (NYSE:AHT), (NYSE:RLJ), (NYSE:WYN), (NYSE:HST), (NYSE:CHSP), (NYSE:OHI), (NASDAQ:SBRA), (NYSE:VTR), (NYSE:HCP), (NYSE:LTC), (ACC-TSX), (NYSE:PEI), (NYSE:SPG), (NYSE:TCO), (NYSE:CBL), (NYSE:ALX), (NYSE:WPC), (NYSE:KW), (REF.UN), (HR.UN), (MRT.UN-TSX), (NASDAQ:ROIC), (NYSE:EXL), (NYSE:WRI), (NYSE:DDR), (NYSE:SKT), (NASDAQ:ARCP), (NYSE:O), (PLZ-TSX), (NYSE:DFT), (NYSE:EPR), and (NYSE:DLR).
Source: SNL Financial provided the author with information for this Seeking Alpha article.