One of the simplest ways to value a REIT is based on its dividend
yield relative to alternatives. Because REITs are a yield investment by
definition -- REITs have to pay out at least 90% of their income as a
dividend -- comparing their yields to the 10-Year U.S. Treasury is a
good way to understand their relative valuation.
I found some historical dividend data for a popular REIT index and
compared it to historical U.S. Treasury yields over the last 15 years.
Not surprisingly, REIT dividend yields have largely kept a tight spread
to risk-free yields, with REITs offering 1.28% more annual yield on
average.
Of course, there were booms and busts. During the years 2004 to 2005,
the general view that real estate was a great inflation-protected
investment that couldn't go down in value led many investors to overpay.
Dividend yields fell below the yield on U.S. Treasuries. The potential
for capital gains blurred the reality that, over the long haul, real
estate is all about cash flow.
(more)
Please share this article
No comments:
Post a Comment