There’s no such thing as a gravity-less rainbow—that’s the lesson US investors learned the hard way during the previous decade’s real estate boom and bust.
Although real estate valuations and underlying fundamentals haven’t approached the danger zone, investors should exercise caution and be selective when considering US real estate investment trusts (REIT).
The Bloomberg North American REIT Index, a capitalization-weighted basket of 164 US REITs, sports a dividend yield of 3.4 percent, compared with the S&P/TSX Capped REIT Index’s 5.4 percent current return and the Bloomberg North American Mortgage REIT Index’s eye-popping 12.3 percent yield. (Read more about our top picks in these groups in Wide World of REITs – Part 1 and Mortgage REITs: High Yields and Big Risks.)
These yield spreads reflect the varying rate at which these indexes grew their dividends over the past two years.
The Bloomberg North American REIT Index led the way, increasing its aggregated dividend per share by 11.37 percent in 2014 and 7.36 percent in 2013.
Meanwhile, the S&P/TSX Capped REIT Index managed to grow its payout by 5.37 percent last year and 4.03 percent in local-currency terms. Dividend cuts haven’t been an issue for these 18 Canadian real estate investment trusts. However, when you factor in the Canadian dollar’s slide relative to the US dollar, the index’s aggregated dividend fell by 2.61 percent in 2013 and 3.59 percent in 2014.
Dividend cuts have occurred with greater frequency in the Bloomberg North America Mortgage REIT Index; sixteen of these 26 stocks have slashed their payout over the past two years—one reason that the index yields more than 12 percent.
The Bloomberg North American REIT Index’s lower yield reflects these trusts’ faster rate of dividend growth relative to their peers in Canada and the mortgage REIT segment. That is, investors bet that growth will make up for a lower current return.