Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



The Most Dangerous Investment in Today's Market

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

While stock investors celebrate the latest jumps in the stock market, those seeking current income from their portfolios continue to struggle with a big problem: how to get payouts they can count on. Yet with risk-free alternatives starting to dry up, those taking on more risk to sustain their income may get burned sooner than later.

Income investors have seen attacks from all quarters. Short-term Treasury securities continue to yield less than 1% -- before tax. Bank CDs, which until recently paid a high premium to Treasury rates, have come down sharply in recent months; the average six-month CD pays just 1.76%, having gotten cut in half just since October. While last week's announcement of record profits from Wells Fargo (NYSE: WFC  ) undoubtedly stems from the high interest rate margins produced by low rates, savers are paying the price.

Because of this assault on the interest payments they receive, investors are looking to riskier strategies to sustain their portfolio income. One place you can find sky-high yields right now is in real estate investment trusts. But with everyone concerned about dividend cuts that have hammered shares of companies from Dow Chemical (NYSE: DOW  ) to Citigroup, are REITs better placed to protect investors from falling income?

The scoop on REITs
To answer this question, you first have to understand how REITs work. Typically, companies have complete discretion over how much they choose to pay in dividends. Plenty of companies, such as Google and Apple, have never paid dividends; others, such as ExxonMobil, have paid dividends at a steadily increasing rate for decades. This flexibility gives most companies the ability to decide whether they'd prefer to retain cash to reinvest into their businesses or return capital to shareholders.

REITs, however, don't have that flexibility. REITs get a huge benefit that other corporations don't get: they are allowed to avoid corporate taxation. But to get that tax benefit, REITs must pay out 90% of their income in the form of dividends.

Sustainable dividends?
The 90% requirement has huge implications for dividend stability. Unlike other companies, REITs ordinarily can't build up cash cushions to help them keep paying high dividends when income falls. That has caused a few dividend implosions already in the REIT universe:

  • General Growth Properties (NYSE: GGP  ) suspended its dividend entirely late last year.
  • Other REITs, including Simon Property Group (NYSE: SPG  ) , have started paying dividends in stock in order to conserve cash.

Obviously, when REITs no longer earn enough income to sustain payouts, something has to give. That's why investors who see REITs as an answer to their income problems really need to check their numbers before investing. Depending on which REIT you're looking at, you may get much different answers. Consider:


1-Year Return

Dividend Yield

Payout Ratio

Omega Health Investors




Simon Property Group




Public Storage (NYSE: PSA  )




Duke Realty (NYSE: DRE  )




Kimco Realty (NYSE: KIM  )




Sources: Yahoo! Finance,

Needless to say, many of these stocks have already taken a big drubbing. But with their payouts so high in relation to income, there's no guarantee that the worst isn't yet to come. And certainly for those who might be thinking about buying REITs primarily for their high dividend yields, you simply can't count on those payouts being sustainable for any length of time.

Be wary
The good news for income investors is that dividend yields on traditional stocks are relatively high. And while you'll find your fair share of dividend landmines there too, those companies at least don't share the pressure REITs have to maintain and pay out dividends consistently in order to retain favorable tax status.

For those seeking an income panacea, REITs aren't perfect. Although they generally make a good contribution to an income-producing portfolio, make sure that you choose REITs that will best weather potential income problems without destroying their dividends in the process.

For more on getting income for your portfolio, read about:

Stock news, financial commentary, and your daily dose of Foolishness: Get plugged in to The Motley Fool on Twitter!

For the best ideas on investments that pay you back, check out our Motley Fool Income Investor newsletter. We'll help you find the best prospects and steer clear of dividend traps -- all for free with a 30-day trial.

Frustrated with your 401(k)? Even if your employer's plan isn't the greatest, you don't have to give up your dreams of a happy retirement. Get the tips you need to turn your retirement savings around in our special report, "How to Make the Most of Your 401(k)" -- just click here for instant free access.

Fool contributor Dan Caplinger loves the income from dividends, even though he just reinvests it. He doesn't own shares of the companies mentioned. Google is a Motley Fool Rule Breakers selection. Apple is a Motley Fool Stock Advisor pick. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy keeps you out of harm's way.

Read/Post Comments (1) | Recommend This Article (21)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 13, 2009, at 4:55 PM, Netteligent09 wrote:

    Our NASDAD based companies are speculative stocks. Somehow gamblers love to pump them up. It is not about investment anymore.

    When the worst comes, we will be in huge troubles because we digging a deep hole that we cannot climb out.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 873401, ~/Articles/ArticleHandler.aspx, 10/23/2016 4:34:10 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:03 PM
DOW $54.10 Up +0.28 +0.52%
The Dow Chemical C… CAPS Rating: *****
DRE $25.84 Down -0.19 -0.73%
Duke Realty CAPS Rating: ***
GGP $26.00 Down -0.12 -0.46%
General Growth Pro… CAPS Rating: **
KIM $28.00 Down -0.04 -0.14%
Kimco Realty CAPS Rating: **
PSA $211.05 Down -3.07 -1.43%
Public Storage CAPS Rating: ***
SPG $196.55 Down -0.71 -0.36%
Simon Property Gro… CAPS Rating: **
WFC $45.09 Up +0.16 +0.36%
Wells Fargo CAPS Rating: ****