It's not hard to see why investors are attracted to the idea of high-dividend-paying stocks. On the surface, these investments seem to offer the best of both worlds: the potential for long-term capital appreciation and a steady income stream. But this perception rests on a fundamental misunderstanding of how dividends work.
Dividends come from profits that a company distributes to shareholders. Companies can reinvest the surplus into business projects, repurchase stock, or pay it out to shareholders in the form of dividends. Alternatively, paying out dividends means that a company will have less capital to fund new or existing opportunities (assuming it doesn't raise capital by issuing additional equity).
REITs: A Disciplined Attraction to Dividends
Historically and for most investors, relying on steady dividends to provide a level and large-enough income has been challenging at best. For those investors seeking yield, the difficulty is in predicting the exact dividend policies companies will adopt in the coming years. And as more investors enter retirement and need to replace substantial proportions of their working-years income by using their investment portfolios, a reliable dividend-yield strategy is a must.
Because Real Estate Investment Trusts (REITs) distribute (by law) at least 90 percent of their taxable income to shareholders annually in the form of dividends, investors are becoming increasingly attracted to the notion of balancing a portfolio with steady and reliable dividend income. A company that qualifies as a REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income. As a result, most REITs historically remit at least 100 percent of their taxable income to their shareholders and therefore owe no corporate tax.
Taxes are paid by REIT shareholders on the dividends received and any capital gains. Most states honor this federal treatment and also do not require REITs to pay state income tax. Like other businesses, but unlike partnerships, a REIT cannot pass any tax losses through to its investors.
REITs: An Attraction to Repeatable Sources of Income
A REIT's ability to attract a roster of high-quality tenants is very important, particularly in retail sectors such as malls and neighborhood centers. In a shopping center, having productive tenants means higher traffic, which means higher sales - for all the stores located there. For the shopping center landlord, such retail prosperity means that the tenants will be able to pay the rent bumps built into their leases, as well as provide additional rent to the property owner when sales coverage provisions are contained in the leases.
Better-quality tenants, whether in retail space, industrial properties, or office buildings, will often be looking to expand, and if the REIT enjoys good relationships with these tenants, they will turn to the REIT when they're ready for additional space.
Accordingly, REITs provide investors with a powerfully unique income strategy in which the differentiated alternative is also the essence of the repeatable value proposition. Unlike most other fixed-income alternatives, REITs perform a valuable task by turning the sources of rental income into powerfully consistent and reliable dividends.
This attraction to repeatability is one of the strongest sources of differentiation and also the reason that many REITs have been able to sustain their competitive advantages over time (and through constant change). Some of the most successful REITs have built their remarkable record of dividend performance on consistency, not just high returns.
Regency Centers (REG), founded in 1963 and public since 1993, is the preeminent national owner, operator, and developer of dominant grocery-anchored and community shopping centers. The company owns 364 retail properties (including a few single tenant properties), including those held in co-investment partnerships. Including tenant-owned square footage, the portfolio encompassed 49.5 million square feet located in top markets throughout the United States. Since 2000, Regency has developed 209 shopping centers, including those currently in-process, representing an investment at completion of more than $3.0 billion (source: SNL Financial).
Regency's strategy of investing and developing highly productive grocery-anchored shopping centers in trade areas with above-average income has been a leading differentiator that has resulted in reliable income and growth. Regency's current occupancy rate is 94.0 percent, and the dominant grocery landlord has a proven strategy that has resulted in a recession proof model that generates consistent customer traffic and repeatable revenues. In addition, the grocery-based model is not as threatening to grocers as the other retailers that are impacted by e-commerce sales.
Weingarten Realty Investors (WRI) has over six decades of shopping center experience, and the Houston-based REIT became a public company in 1985. Earlier this year, Weingarten sold off its wholly-owned industrial portfolio (52 properties) to DRA Advisors LLC for a price of $382.4 million (representing a capitalization rate of approximately 8 percent).
Building a circle of competence is important for investing, and Weingarten has further strengthened the company's "core of competence" by "sticking to its roots" of being a dominant grocery landlord and necessity-based REIT. By selling off non-core assets, Weingarten will be in a better position to grow its brand and enhance occupancy and FFO.
Weingarten owns 316 properties and 11 properties under various stages of construction and development. The total number of properties includes 301 neighborhood and community shopping centers and 26 other operating properties located in 21 states spanning the country from coast to coast, representing approximately 63.8 million square feet.
Kimco Realty (KIM) owns and operates 926 properties across 44 states (comprising 136 million square feet of leasable space), Puerto Rico, Canada, Mexico, and South America. Headquartered in New Hyde Park, N.Y., Kimco owns and operates North America's largest portfolio of neighborhood and community shopping centers. This diverse portfolio includes many brand name retailers, and the "fortress" platform remains the largest landlord of Costco (COST), Home Depot (HD), TJ Maxx (TJX), Target (TGT), Ross Stores (ROST), Walgreen (WAG) and Whole Foods (WFM), all strong investment grade companies.
Publicly traded on the NYSE since 1991, and included in the S&P 500 Index, Kimco has a BBB+ S&P rating (one of just eleven REITs with a BBB+ or higher rating), and with ample liquidity, the "blue chip" REIT has a focused strategy of building stable and growing recurring income. Kimco's overall occupancy rate is 93.5 percent. (Source: SNL Financial).
Taubman Centers Inc. (TCO) was founded by A. Alford Taubman in 1950, and the retail landlord converted to a REIT in 1992. Taubman's 24 property portfolio (23 owned) is considered more of a "quality" than a "quantity" model. The $4.937 billion (market cap) REIT has the highest portfolio sales per square foot ($641 per square foot) in the mall industry, and that repeatable metric is a fundamental driver for the consistency in dividends paid.
By combining tenant quality with demographics, Taubman has one of the highest overall quality portfolios in the mall sector. Taubman's strategy of securing the highest quality anchors provides superior drawing power, and that differentiation is the primary reason that the REIT has reported eight straight quarters of double-digit sales per square foot increases.
Realty Income Corporation (O), The Monthly Dividend Company®, has paid 503 consecutive monthly dividends (as of June 30, 2012) throughout its 43-year operating history. The monthly income is supported by the cash flows from 2,762 properties owned under long-term lease agreements with 136 leading regional and national retail chains and other commercial enterprises.
I consider Realty Income to be one the safest and most reliable revenue models, and I described my fixation to the REIT's "low cost producer" platform in this article that I wrote last week: The Conundrum of Triple Net Lease Valuation.
National Retail Properties (NNN) is a leading triple-net REIT based in Orlando, Florida. National Retail is one of only four publicly traded REITs and 104 publicly traded companies in America to have increased annual dividends for 23 or more consecutive years.
National Retail Properties value proposition is built around the company's extraordinarily successful track record of providing consistent and increasing dividends. This premium fixed-income brand has a measurable record of performance as the company has paid increased dividends longer than 97 percent of all public REITs and 98 percent of all public companies.
Monmouth Real Estate Investment Corp. (MNR) is a 45-year REIT whose business model is investing in single-tenant industrial properties secured by long-term net-leases to investment grade tenants. Accordingly, this stalwart REIT provides investors with a total return vehicle that performs well throughout the business cycle. As one of the oldest REITs, Monmouth is a multi-cycle tested company and its consistent performance speaks for itself.
Monmouth has two unique value propositions. First, around 50 percent (based on annual revenue) of Monmouth's portfolio is leased to Federal Express (FDX). Second, Monmouth has around $45 million invested in REIT securities. These combined differentiators make Monmouth a somewhat unique REIT with a repeatable revenue operational platform.
Founded in 1981, Tanger Factory Outlet Centers, Inc. (SKT) is headquartered in Greensboro, North Carolina, and the retail REIT has portfolio of 39 upscale outlet shopping centers in 25 states coast to coast and in Canada, totaling approximately 11.9 million square feet leased to close to 2,500 stores operated by more than 435 different brand name companies.
Tanger has increased its dividend each year since the initial public offering in 1993. By maintaining a conservative FFO payout ratio, Tanger has been able to provide a competitive advantage and enviable track record for paying 18 years of dividends (consistently and increased).
American Realty Capital Trust (ARCT) is a new addition to the great repeatable public REIT space; however, the triple-net REIT was formed over four years ago by Nicholas S. Schorsch, the company's co-founder and Chairman, and William M. Kahane, the co-founder and President and CEO, and these veteran sponsors have substantial public REIT operating experience and collectively have over 70 years of commercial real estate experience and collectively have over 20 years experience focused on the net-lease real estate sector.
American Realty Capital Trust started out small, raising money through retail broker dealer channels, and after almost four years (as a non-traded REIT), Schorsch and Kahane listed (on Nasdaq) the company's shares. As of Q2-12, the company has 486 triple-net leased properties with a portfolio occupancy of 100 percent.
Simon Property Group, Inc. (SPG) is an S&P 100 company, and the largest real estate company in the world. The company currently owns or has an interest in 339 retail real estate properties in North America and Asia comprising 245 million square feet. Simon is headquartered in Indianapolis.
Simon's Premium Outlets portfolio features 72 Premium Outlet Centers® including 59 in the United States, one in Puerto Rico, eight in Japan, two in Korea, one in Malaysia and one in Mexico. Its industry-leading properties include Woodbury Common Premium Outlets (New York City), Orlando Premium Outlets, Desert Hills Premium Outlets (Palm Springs, California), Las Vegas Premium Outlets and Wrentham Village Premium Outlets (Boston).
Repeatable Dividends: The Essence of REIT Investing
Since REITs pay out over 90 percent of income in the form of dividends, they are disciplined to provide consistent and sustainable dividend income for shareholders. Accordingly, the REITs with the strongest sources of lasting differentiation are deemed to perform the best and serve core investors better and more profitably.
All ten of these REITs have built their strategies on vivid and hardy forms of differentiation, and the power of the repeatable income model should provide investors with a reliable dividend strategy.
Skillful risk control is essential and is also the mark of a superior REIT investor. By researching income composition, a skilled and sophisticated dividend investor can look at a portfolio in good times and divine whether it's a low-risk or high-risk portfolio. The attraction to dividend repeatability is one of the strongest sources of REIT differentiation and also the reason that many investors include REITs in their overall portfolio strategies. A well-balanced portfolio, including REITs, will provide investors with an attractive total return composition of income and growth - both essential ingredients for an Intelligent Investor.