With bonds letting investors down in a big way this year, income from alternative asset classes like REITs is taking on added importance. One of the primary sources of income in the alts space is real estate.
In fact, real estate dividends are proving sturdy this year, underscoring the benefits of funds such as the Virtus Duff & Phelps Global Real Estate Securities VGISX.
“Eight U.S.-based publicly traded equity real estate investment trusts announced increases to their regular dividend payments in September,” according to S&P Global Market Intelligence. “The most recent dividend hikes have brought the year-to-date total to 83 for U.S. REITs, or about 51.6% of the entire U.S. REIT industry a sector basis, 14 residential REITs in the U.S. have announced higher dividends year-to-date, or about 77.8% of all residential REITs.”
Industry-level dividend differences in the broader real estate sector are meaningful for investors when evaluating real estate because some passive products may be under-allocated to strong sources of payout growth while possibly being overexposed to slow growth groups that could be vulnerable to dividend disappointment.
Those points highlight the potential benefits of VGISX being an actively managed fund. For example, as of the end of the third quarter, VGISX’s combined weight to office and data center real estate investment trusts (REITs) was about 13.5%. Those are two of the lagging REIT sub-groups this year.
From a dividend perspective, VGISX’s ability to be nimble is meaningful because payouts aren’t promised and dependable growth is important over the long term, particularly in inflationary environments such as the current one.
“What’s more, dividends aren’t guaranteed, unlike the interest payments from Treasuries. Companies can trim or slash their dividends at any time, a risk that was realized in 2020 after 68 of the roughly 380 dividend-paying companies in the S&P 500 suspended or reduced their payouts,” according to Charles Schwab research.
Regarding the ability of active management to source dividend growth opportunities, that’s relevant because payout growers often outperform the broader market over long holding periods. In the real estate sector, which is capital-intensive, sturdy balance sheets are obvious positive traits.
“Generally speaking, you want to find companies that not only pay steady dividends but also increase them at regular intervals—say, once per year over the past three, five, or even 10 years. Indeed, companies that grow their dividends tend to outperform their peers over time,” concluded Schwab.
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