In February 2009 UK’s HM Revenue & Customs had a stance: "We can confirm ... that under current legislation the technical view is that a stock dividend does not qualify as a property income distribution for the purposes of a REIT." This statement was a slap on the face of REITs in the UK. But, I believe, the interests of the investors were well protected.
Zoom back to the US. The US government’s not-so-tough stand allowed REITs to pay up to 90% of their dividends in stock. Consequently as most of us knew then, several REITs have taken advantage of the rule this year. From a cash management perspective, it is better for companies to keep an eye on every piece of cash and be shepherding capital to the best of their ability. But from the prospective of the REIT industry, a lot of investors care about cash dividends and the simple thought REITs will be paying these in stock lessens the attractiveness of REITs to the investing public, both retail and institutional investors.
As fundamentals across the industry deteriorated, REITs began locking up cash for themselves and gave its investors new shares. Thus if yields on equity REITs are considered high – much of it would have come from stock and not cash! And the net advantage to the investor – Nil! (Frankly, this is no better than a stock-split.)
There’s more… The December 2008 ruling allows REITs to surpass the requirement to pay 90% pretax income to shareholders as dividend, to avail tax exemption. REITs will be allowed to keep the money instead of paying investors. The result: 100% of the dividends will be taxable to the investor. In short, for a $100 dividend from an REIT, $10 would be in cash and $90 in stock; and the amount you owe the IRS (considering a 35% tax bracket) would be $31.5. This most probably means that you end up paying taxes on an income you haven’t really received and most likely never will!
The million dollar question is – Will I ever get my money's worth?