10 NOTES FROM MY REITs FIELD JOURNAL:
1. As a real estate investor for over three decades, I’ve seen a number of economic cycles – and the power of financial discipline.
2. Thousands of empirical studies show that companies usually don’t make good use of their cash – when it’s lying around, they usually spend it on projects that don’t benefit shareholders.
3. Not just with REITs, but in general, shareholders are better off when companies pay out earnings as dividends. When a company wants to make an investment, shareholders benefit if capital is raised by “going outside” – floating a secondary equity offering or corporate bond, or seeking private debt from a bank or other source, etc.
4. Companies get timely feedback: if “what they want to do” is good, then funding will be available on favorable terms. If it’s a bad idea, it will be harder to find funding.
5. And funding comes with a cost, and a high equity multiple provides the company with a better cost of capital, that’s also “capital market discipline.”
6. So, if company managers are making good use of cash, they don’t need to withhold dividends because the company will consistently have favorable access to capital.
7. The most common reason a company has, to avoid paying dividends, is to avoid subjecting itself to capital market discipline – which means company managers retain the ability to make bad use of their cash.
8. Empirical evidence shows dividend policy affects company management decisions, and companies that pay out most or all of their free cash flow as dividends, do better (all things being equal) than companies that hold onto their free cash flow.
9. To help prove the point, I had to conduct my own experiment, comparing 5 of my top SWAN (Sleep Well At Night) picks… with 5 randomly-picked non-REIT blue chips… over 5, 10, 15, and 20 years. (The non-REITs were: BAC, KO, PG, JNJ, and WFC.)
10. My hand-picked blue-chip REITs performed well over the years (despite lackluster performance in the first quarter 2018). In fact, in the two-decade history, comparing my REITs with the non-REIT blue-chips, four of the five REIT companies… out-performed. The average annualized price increase for all 5 REITs over 20 years was 24.3% vs. 7.3% for the non-REITs.
Here are the five REITs that out-performed… due to their powerful capital management discipline – with an extraordinary record of dividend growth.
Realty Income (
Simon Property Group (
Federal Realty Investment Trust (
National Retail Properties, Inc. (
Essex Property Trust Inc. (
Note: We will provide a detailed SWAN (Sleep Well At Night) research report in the September edition of subscriber-based Forbes Real Estate Investor.