How Important Should Dividends Be to REIT Investors?

Real estate investment trusts, or REITs, are known for paying above-average dividend yields, but many REITs also have excellent growth potential. Obviously if you're a retiree who relies on your portfolio for income, dividends are an important part of the equation. But for long-term investors, how much of a role should dividends play in REIT analysis?

To find out, we asked three of our REIT experts -- Matt Frankel, CFP, Matt DiLallo, and Kevin Vandenboss. Hear what they had to say in this October 22 Fool Live clip.

Matt Frankel: Here's a comment: "My main reason for investing in REITs is to balance out my strong growth stocks. I believe REITs offer safer overall upside and as long as it beats the market, a win is a win."

There is a question: "That being said, do you guys have a method to calculate percent returns by factoring in dividend payments?"

I think what he's referring to is total return. It's important to mention that. I will use Kevin's example, Omega Healthcare (OHI 1.42%), that pays a 9% dividend yield. If that stock price goes up even by 2% per year, there's an 11% total return, and you've outperformed the market even though the stock really hasn't budged. With REITs more than individual stocks, I'd say it's more important to consider the big picture. How do you guys look at REIT returns? You're both approximately my age, I would say. You're probably not that worried about income from your investments at this point, but how much do dividends play a role as opposed to growth when you're looking at a REIT?

Matt DiLallo: I'm a big dividend investor even though I've got a long way to go to retirement, but that's because I like to use the income to buy growth stocks. So instead of reinvesting it back into the same stock, I let it sit on the sidelines until it piles up there, and I finally get a growth stock that I want to invest in. I compound differently than I guess other investors would, but that's just my style.

Kevin Vandenboss: Dividends are huge for me. I don't know. Like Matt said, I like to take those dividends and you can do a lot with them. Especially anything that's paying over 5%, a decent amount of dividend income that you can reinvest into savings, some gross stocks, or other REITs that may not pay as great dividends but have a lot of upside in the price.

Matt Frankel: Yeah. It's important to consider the big picture. I call them the sneaky high dividends, like Omega pays, where you don't really think of a healthcare stock as a massive income play, but it can, and there's a lot of room to grow in that market too. It's also important in REITs, even more so in other stocks. Don't think because it has a high dividend that it has limited growth potential, just because REITs are naturally high dividend players. Go ahead.

Kevin Vandenboss: I like Omega, I can't remember exactly, but they're not typically a 9. Pay 9% dividend REIT, it's simply because the pandemic got the prices so low. These REITs that you might see as more of a growth just happen to be paying the average yield right now. Especially if you look at their dividend growth rate, 9% could turn 11% in five years or so.

Matt DiLallo: That goes back to the whole idea of FFO ratios. I'm looking at that on a lot of times, because REITs had sold off, they are trading for a cheaper price. Well, the inverse of that is that the yield goes up. So you're getting something for cheaper and it's paying a higher dividend.

Kevin Vandenboss: Right. Yeah.