What makes a REIT different from any of the other stocks that regularly declare dividends?
While it’s true that dividends can be declared on any common stock, and that there are many other stocks on the PSE that have dividends regularly declared to their owners, REIT stocks are unique in that the dividends are actually compelled by law. REIT stocks are required, by law, to dividend at least 90% of distributable income earned in a year. No other companies on the PSE are compelled by law to issue dividends.
So, while there are other companies that may issue larger dividends and have a long history of very stable dividend declaration, there’s nothing that legally compels the board of any company to declare dividends to common shareholders, regardless of how successful that company is or how long its history of consistent dividends may be. That increased certainty, in part, is what differentiates the REIT from the regular dividend-declaring stock.
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This legal compulsion to declare dividends doesn’t guarantee a particular return, though, so it’s important to remember that while a REIT may be required to dividend out at least 90% of its distributable income, the law doesn’t say that the REIT must maintain a consistent dividend rate.
For example, say that a once-in-a-lifetime infectious disease cripples the economy for years and greatly reduces demand for in-office workers: in that hypothetical (super unlikely, I know), it’s possible for some of the commercial REITs to suffer significant hits to revenue.
Occupancy rates could fall, companies could break leases or fail to pay, and all of this would have a negative drag on the REIT’s distributable income.
The law would still require the REIT to dividend out at least 90% of that distributable income, but it doesn’t require the REIT to maintain the previous pace of dividends to deliver a specific yield to investors. The yield is not protected by law.
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Merkado Barkada's opinions are provided for informational purposes only, and should not be considered a recommendation to buy or sell any particular stock. These daily articles are not updated with new information, so each investor must do his or her own due diligence before trading, as the facts and figures in each particular article may have changed.
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