What Should I Look For When Buying REIT Stocks?

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When we analyze Real Estate Investment Trusts (REITs), one of our first goals is to research dividend growth, including the elements that perpetuate the escalation. The companies in question must generate greater earnings in order to accomplish that. In the world of REITs, this falls under the metric called funds from operations, or FFO.

FFO has traditionally been either the first or second metric that every REIT states in their quarterly financial reports. If the FFO increases, companies will more than likely reward their shareholders with larger dividend payments. We must remember that REITS are required to distribute ninety percent of taxable income to their shareholders.

Regarding well-established REITS, consistency in delivering dividend increases, along with management’s commitment to build healthy dividend track records, have become the gold standard of the industry. Although past history certainly does not guarantee future performance, several REITs position investing in their companies based on the number of consecutive quarters they pay either increasing or flat dividends. This is a powerful pitch due to the fact that it takes decades to build up a good reputation based on strong distribution. That being said, it only takes a quarter, and often times only a month of non-distribution of dividends to unravel years of hard work.

Dividend yield is certainly something that you should be paying close attention to, but there are other factors that need to be considered as well. Stocks often enjoy high yields due to the decline of the share price instead of paying large dividends. Thereby high yields are not always a clear-cut indication of a good stock to purchase.

Finally, it is extremely important to research whether or not a company is distributing dividends in an excessive manner. The dividend payout to FFO shows the exact percentage of FFO the dividend is equal to. Healthy companies typically maintain a dividend payout below the ninety percent mark. This enables them a cushion to leave room for further increases.

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