Real estate investment trust dividends are not based on earnings but rather on a company’s cash flow statement. That’s because REITs have peculiar accounting rules that produce low payout ratios. For example, depreciation is included in net income but doesn’t affect cash flow because properties don’t lose value over time like fixed plant or equipment. However, REITs must use a broader definition of earnings to qualify for tax benefits. In a nutshell, FFO excludes depreciation and property gains, while AFFO includes those items and subtracts capital expenditures.
A good REIT should have strong operating cash flows that are sufficient to cover debt service. The company should also generate enough funds to make improvements on its properties and invest in new ones, too. This will boost revenue and profit, which should lead to higher dividend payments in the future. Also read https://www.pandaprohomebuyers.com/selling-a-house-when-relocating-in-maryland/
In addition to analyzing a REIT’s cash flow statement, investors should consider its growth prospects and whether it is a defensive sector. This means evaluating the REIT’s competitive positioning in its industry and whether it can increase revenue by raising rents or cutting expenses. For example, Medical Properties REIT (MPWR) is a healthcare REIT with strong occupancy rates and a track record of increasing rents. In addition, the company is focusing on upgrading its properties to attract more high-quality tenants, which should lead to better tenant retention and lower eviction rates.
Investors should check the REIT’s liquidity because non-traded REITs can be illiquid investments that cannot be sold easily on the open market. On the other hand, many REITs offer dividend reinvestment plans that allow shareholders to automatically buy additional shares with their current dividends. While this can be a great way to build a stake in the REIT over time, it is important to note that REIT dividends are not free from taxes.
Depending on the type of REIT dividends shareholders receive, they may be subject to ordinary or capital gains taxes. Dividends from REITs that make their profits by selling real estate or assets are taxed as capital gains, and the investor’s individual tax bracket determines how much they’ll owe. Investors in the highest tax bracket can owe up to 20% on REIT capital gains dividends.
REITs are an excellent way to diversify a portfolio by including real estate in your mix of investments. To find the best REITs for your portfolio, compare the dividend yields of each REIT with the average of its peer group and its industry’s benchmark. Then, look for a REIT with a strong track record of increasing its dividend and a healthy balance sheet to support a solid future. Finally, remember that REIT dividends aren’t guaranteed and can decline in the short term. As such, you should consider investing in REITs only as part of a well-diversified portfolio for the long term.
