- REITs help to balance the conventional common stock portfolio by reducing volatility and by providing a natural hedge against inflation.
- Because REITs pay consistent dividends, they are more than just icing on the cake.
- I consider dividends to be the “secret recipe” for REIT investing.
Over five years ago, my friend and fellow Seeking Alpha contributor Chuck Carnevale wrote an article called Dividends Provide A Return Bonus. Here’s an excerpt:
With all things being equal, dividend paying common stocks provide their shareholders a return bonus, or what some might like to call a kicker, over an equivalent common stock that pays no dividend.
Many investors do not see it this way, as they tend to think of the dividend providing them their return. However, the stock market capitalizes earnings whether a company pays a dividend or not. Moreover, we contend that the market will value a given company's earnings based on their past and future prospects for growth, again, regardless of whether a dividend is paid or not.”
Carnevale went on to write about the concept of total return investing as he explains,
An investment in a common stock typically offers their shareholders two components of return. The first component is the capital appreciation component or the increase (or decrease) in the stock's value over time.
The second component is the dividend, or lack thereof, that the company pays to shareholders in cash, typically once a quarter. The two added together equal the shareholders' total return. On the one side, we have the capital growth component and on the other side the income component.”
The important point behind Carnevale’s article was that when comparing two companies with equivalent rates of earnings – one paying a dividend and the other not paying – the dividend-paying company will pay their shareholders a higher total return. In other words of Carnevale,
The stock that pays a dividend to its shareholders is providing them a return bonus or kicker.”
Carnevale went on to write that in either case, dividend paying or not, the bulk, or majority, of total return will be provided by the capital appreciation component.
Accordingly, Carnevale sums up by explaining,
this is why we are saying that dividends are a kicker or bonus return. In other words, capital appreciation is the cake and dividends (if any) are the icing.”