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As the newest sector tracked by the S&P 500 Index, real estate plays a dynamic role in the financial markets. Despite their relatively small size, Real Estate Investment Trusts (REITs) are known for their dividend prowess, giving them an important role in any well-balanced income portfolio.
On Aug. 31, 2016, real estate officially became the eleventh primary sector to be tracked by the S&P 500 Index. In doing so, it became the first new sector entrant since 1999.
With a market capitalization of $1.24 trillion, real estate is tied for last in terms of overall representation. Since inception the subindex has gained a paltry 4%, vastly underperforming the broader market average and high-profile sectors such as financials and information technology. This comes despite the S&P 500 booking its longest bull market on record.
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Within the S&P 500, real estate is further broken down into two categories: REITs and Real Estate Management and Development Companies. From the perspective of income investors, Dividend.com still tracks real estate companies as part of the financial sector, which consists of 60 components. The real estate-relevant categories and their dividend information are provided in the chart below as of August 28, 2018.
|Industry||Company Count||Industry Dividend Yield|
|Real Estate Development||49||3.49%|
|REIT – Diversified||54||4.66%|
|REIT – Healthcare Facilities||20||4.24%|
|REIT – Hotel Motel||25||3.49%|
|REIT – Industrial||19||3.81%|
|REIT – Office||29||2.98%|
|REIT – Residential||41||4.04%|
|REIT – Retail||44||3.76%|
As the chart illustrates, REITs and other real estate management companies yield exceptionally well in comparison to other financial components and the broader market. The average dividend yield for the S&P 500’s financials index is 2.95%, putting it in top spot versus other sectors. All the property management and REIT categories listed above yield more than the financials sector average.
A closer evaluation of the retail subcategories reveals solid income across the board, with virtually every industry surpassing the S&P 500’s average yield of around 1.75% (as of Aug. 29, 2018). Some of the top-yielding categories within real estate include specialty (6.02%), health care (5.89%), free standing retail (5.01%) and regional malls (4.94%). In fact, the retail category as a whole, inclusive of shopping centers, regional malls and free-standing buildings, boasts the highest average yield, based on 2018 data.
Interestingly, residential REITs have been among the worst performers amid the gradual cooldown in the housing market. Home sales in the United States have declined sharply in recent months, as affordability issues and rising interest rates weed out potential buyers.
Below is a detailed breakdown of the sector’s yield performance as of Q2 2018.
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For income investors, very few industries are as attractive as REITs. That’s because the Securities and Exchange Commission (SEC) has specified that these companies must distribute 90% of their taxable earnings to shareholders.
As far as the SEC is concerned, “taxable income” has a very specific meaning – namely, it refers to financial results explained through generally accepted accounting principles (GAAP). Real estate trusts determine their dividend payouts based on their cash flow statement rather than their earnings. Even REITs with negative GAAP earnings still pay dividends.
In Spite of the 90% Rule, Why Do Some REITs Have Poor Payout Ratios? Find out here.
For yield-seeking investors, real estate trusts offer both advantages and disadvantages. Below is a quick rundown of each.
Real estate investment trusts should be on the watch list of every yield-seeking investor. However, there’s often a price to be paid for higher payouts. It therefore makes sense to align REITs with your investment objectives rather than simply chase the higher yield.
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