Dividend Growth Investing – REITs

When we first started looking at real estate investment trusts (REITs), we saw them as an opportunity to get some exposure to real estate because we didn’t want to put all our eggs in one basket by having a mortgage. The interesting thing about REITs is that they behave differently than any of the 10 GICS stock sectors. Now GICS noticed that too, which is why we’re going to have 11 sectors before the end of the year because GICS has decided as allocating REITs to their own sector which means we will soon have 11 sectors.

Prior to that announcement, we were buying REITs without having much of a methodology except this. If a stock has a track record of increasing dividends every year, then that leads us to believe that they will continue doing so. So can we measure REITs using the same Q-Score methodology that we have used for all other sectors so far? The answer is yes and no.

REITs behave very different from stocks over time and are subject to rules and regulations regarding what must be paid out to investors in the form of dividends, oftentimes resulting in REITs with very high payout ratios. Most REITs traded in the U.S. are only in the business of U.S. properties so you will have no international exposure. REITs are complex instruments, and we’ll leave it to all the armchair analysts on Seeking Alpha to analyze the more than 200 REITs in the U.S. registered with the SEC that trade on one of the major stock exchanges.

What we’re going to look at instead are all REITs that have paid and increased dividends for 20 years or more which gives us the below list:

REITsNotice how just by applying that simple rule we eliminated 96% of REITs immediately? Now we exclude any companies with a market cap less than $5 billion. While we typically use a cutoff of $10 billion, in some cases like the utilities sector we need to drop our cutoff because all the companies are smaller. After applying our cutoff, we are left with just 5 companies. Let’s look solely at their track record of paying and increasing dividends which is as follows:

REITs Years Paid

Right away we’re going to add Federal Realty Investor Trust (FRT). That is an incredible track record and one they will most likely do anything to keep from breaking. The next stock on our list is HCP which is frankly looking like a mess. They recently had a class action lawsuit filed against them by their investors. We’re just going to stop right there. The present investors are suing HCP and claiming that the Company was involved in fraud. While it’s not a reason to sell HCP if you already own it, we’re skipping over this one for obvious reasons.

The next REIT on our list is National Retail Properties which has increased their dividend for 26 years now. The next stock on our list, Realty Income Corp. is revered by many for it’s stable and frequent income streams giving it the nickname of “the monthly dividend company“.

While our method of selecting our REITs wasn’t very sophisticated, it was at least simple and straight forward. The REITs with the best track record for increasing their dividends over time are the ones that are most likely to keep this up going forward. You would be hard pressed to find any hardcore REIT investor who wouldn’t own at least one of these 3 REITs. We’re not going to do much else here expect set our positions and forget them. We’ve actually started building positions in NNN and FRT about 4 years ago as seen below:


In order to hit our target position size of $13,333 in each of these REITs we’ll need to make the following monthly contributions:

  • FRT: $165
  • NNN: $100

What about O you might ask? Well, we started buying O in mid-2014 with fixed monthly amounts and then went against our own advice of not trying to time the market and pulled the trigger on two large buys in May/Jun 2015:


Our position in O has performed so well since then that our 220.524 shares are now valued at $15,357 or about +50% more than our cost. Here at Quantigence we only care about income streams that grow so we’re not all that excited by the share price increase. What we are excited about are those monthly payments that keep popping up in our account which we’re investing right back into O.

So will we trim the position since it exceeds our $13,333 target? We will not. Instead we will wait until our entire portfolio is fully vested in 2 years’ time and then see if we need to trim any positions that exceed 5% of the portfolio size or $20,000. O is still well away from hitting that target, even with our ongoing dividend reinvestments.

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