REIT ETFs Still Offering Consistent Dividend Growth

Real estate investment trusts (REITs) and the corresponding exchange-traded funds faced a trying environment in 2015 as investors anticipated the Federal Reserve's first interest rate increase in nearly a decade, but that did not prevent many investors from searching for yield with REIT ETFs.

“Despite the modest pressure on REIT stocks in 2015 amid concerns regarding potentially higher interest rates, investors put $1.7 billion of fresh money into REIT ETFs, according to SSGA data. S&P Capital IQ thinks one of the appeals of a diversified approach to investing in REITS is their different asset class categories to mitigate risk in any one area of real estate and high cash flows to support dividends,” said S&P Capital IQ in a new research note.

Related Link: Enticing Yields And Risks With Mortgage REIT ETFs

With above-average yields being one of the primary reasons income investors turn to REITs, it is notable that the asset class is participating in the recent dividend growth seen throughout the broader financial services sector. Real estate stocks will be classified as financial services names until late August when real estate separates into the eleventh S&P 500 sector.

Looking Into REIT ETFs

The Vanguard REIT Index Fund VNQ, the largest real estate ETF by assets, sports a trailing 12-month dividend yield of 3.92 percent, or nearly double the 2.04 percent yield currently found on 10-year U.S. Treasurys. The Schwab Strategic Trust SCHH yields a more modest 2.48 percent.

“But some investors in large-cap REITs also received double-digit increases to cash payments last year. For example, Public Storage PSA, a specialized REIT, raised its dividend 21 percent in April 2015; PSA has a $43 billion market capitalization that grew during 2015 as the shares rose. PSA ended the year with a $6.80 per share annual dividend (2.7 percent yield). S&P Capital IQ noted that third quarter 2015 (latest available) occupancy rate at 95 percent and rent-per-square-foot growth was ahead of its peers. Funds from operation (FFO) are projected to rise 9 percent in 2016,” according to S&P Capital IQ.

VNQ and SCHH also treat investors to paltry fees, as the pair charges 0.12 percent and 0.07 percent per year, respectively.

The rub is that REITs are seen as richly valued relative to the S&P 500, trading at an earnings multiple that is more than double that of the benchmark U.S. index and nearly triple that of the broader financial services sector.

S&P Capital IQ has an overweight rating on shares of SCHH.

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