Top 10 REIT Performers For 2016

In simplest terms, the price of a stock is driven by the yield and a security is most attractive when it offers the highest overall yield.

Conversely, the price of a stock eventually reaches an area were the yield is no longer attractive and buying stops, that becomes the tipping point and the stock price begins to drop.

But the real attraction to a company’s dividend is not just its current yield, but its dividend record. The current yield tells us absolutely nothing about profitability , instead, the most important measure of value and predictability of future profits is the company’s overall dividend performance.

It stands to reason that when a dividend is increased, the underlying stock price will rise to reflect the increase in value. On the other hand, when a dividend is reduced, the stock price will certainly decline in value.

Because Real Estate Investment Trusts (or REITs) must payout at least 90% of taxable income in the form of dividends, the stocks are arguably more predictable in terms of their dividend performance attributes.

You see, most REITs own commercial real estate that generate consistent rental income from a variety of lease contracts. So the cash flow generated by the REITs provide a high level of transparency and predictability as it relates to future dividend increases.

For example, an investor can own shares in Starbucks (SBUX) and he or she must rely on company forecasts and a variety of other elements to predict dividend growth in 2016. On the other hand, an investor who owns a building leased to Starbucks can predict future profits better because the future cash flow performance is correlated to the lease contact.

That’s precisely why REITs are better at forecasting future profits and dividend growth.

When I research a REIT, I rely on a variety of metrics to assess future performance, and dividend growth is a leading indicator.

I start the process by analyzing the REITs historical dividend record. Did the company cut its dividend? Is the company borrowing money to pay the dividend? Does the dividend appear sustainable?

Many REITs were forced to cut dividends during the last recession and I analyze the performance of these companies to determine how well they have done since the recession. There were only a dozen REITs that managed to increase their dividends during the last recession and these REITs are highly favored for their discipline and exceptional risk management practices.

An ongoing dividend stream is the most reliable evidence a company is generating sufficient earnings (or funds from operations) to payout a dividend. So when a dividend is increased, the shareholder knows with a high degree of certainty that the company is safe and sound. In The Ultimate Dividend Playbook Josh Peters explains,

A dividend payment is the ultimate sign of corporate strength…the safest dividend is the one’s that just been raised.

This year I decided to create an article highlighting the REITs that I expect to generate the most robust dividend growth in 2016. As Josh Peters explained, “dividend increases provide the best possible evidence of dividend safety” and dividend increases provide the “loudest and clearest message that management can send.”

Here’s a list of the REITs based on their 2015 dividend growth record (note: I excluded STORE Capital since the company did not have a full year of dividend history as a public company in 2014).

Now, as you can see below, I have ranked these REITs based on their forecasted dividend growth in 2016. I based the estimates on FASTGraph analyst consensus data:

In closing, dividend growth is an essential part of investment analysis and it’s important to own companies with consistent profit margins over a span of time. By paying close attention to profit margins and dividend records, an investor will be better positioned to predict the future performance of the enterprise. Finding attractive dividend-paying stocks is only part of the puzzle, buying them is another piece. For more information, visit my website HERE.

The author owns shares in (EXR), (CONE), and (HASI).

Brad Thomas is the Editor of the Forbes Real Estate Investor and writes for Forbes.com and Seeking Alpha. He is also a frequent guest on Fox Business and he is currently writing a book, The Trump Factor, about U.S. presidential candidate Donald J. Trump. Given the author’s in depth analysis of Trump, this book is certain to be a “game changer”.