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Stock Strategist Industry Reports

REIT Stock Dividends: Boon or Bust?

We think the days are numbered for REIT dividends paid in stock.

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If cash is king, then most real estate investment trusts are paupers. As the commercial real estate markets face fundamental declines, REITs are in a dire position as these leveraged companies scramble to pay down debt and refinance mounting maturities. Property sales, dividend cuts, and equity issuances have been all too common over the past few months as REITs work to improve liquidity in a difficult operating environment. Some companies have resorted to the controversial and widely debated stock dividend. Paying out stock in order to retain cash has helped some companies better traverse the tumultuous credit markets, but at what cost to shareholders? Furthermore, do the benefits outweigh those costs? As always, it depends.

A Brief History of REIT Dividends
The REIT structure was established in 1960, giving the average investor access to investments in large-scale commercial real estate projects. The modern REIT does not pay income taxes at the corporate level, but it is required to pay annually at least 90% of its taxable income in the form of shareholder dividends--although historically REITs have paid dividends well in excess of their required distribution. In 2001, the Internal Revenue Service began making private letter rulings, allowing some REITs to pay as much as 80% of required dividends in the form of stock, which fulfilled their distribution requirements under REIT rules. In January 2009, following the solicitation of the National Association of Real Estate Investment Trusts and other industry leaders, the IRS issued a ruling allowing publicly traded REITs to pay as much as 90% of their required dividends in stock through year-end, allowing those firms another avenue to improve liquidity. Many companies choosing to pay in stock have opted for cash distribution levels higher than the 10% floor.

David Rodziewicz does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.