Don't Be Fooled by These Dividend Stocks

With the rise of mobile and electronic commerce, the rocky road continues for some retailers trying to keep up. But while many popular brands like The Gap, Abercrombie & Fitch, and even Best Buy have been closing stores, some companies are betting on brick-and-mortar's endurance.

Should investors be taking the same gamble? This Fool thinks not.

According to Ellen Dunham Jones, professor of architecture at Georgia Tech, no enclosed shopping malls have been built since 2006. This alone doesn't prove the downfall of brick-and-mortar shops, as open-air shopping centers have been built in that timeframe, but it does speak to shifting consumer shopping trends.

Both styles of mall were popular formulas for success pre-recession, and the real estate investment trusts invested in them did well. Unfortunately, 2008 was not a good year for property owners or retailers, so a double whammy was dealt to these REITs.

CBL & Associates Properties Stock Chart by YCharts

Since 2008, it doesn't seem that these companies have been able to do much. Even Tanger Factory Outlet Centers (NYSE: SKT), whose outlets benefited from the emergence of budget-conscious consumers, was really only able to hold steady through it all.

Value investors may take that fact, the REITs' dividend yields, and price-to-funds-from-operations ratios as signs of a great buy right now, but after we take a look at these numbers, I'll explain why I disagree.

A company's funds from operations, or FFO, are what you get by adding the depreciation and amortization back into the net income. It's a great way to evaluate REITs, since real estate behaves a bit differently (maintaining or even increasing in value, rather than losing it over time) when compared to a normal company's assets. For a better understanding of FFO, check out this article.

In the table below, I've calculated the price-to-funds-from-operations-per-share ratios, which you can use to evaluate these REITs in place of a regular price-to-earnings ratio.

Source: Yahoo! Finance.

At first glance, none of these ratios seems outrageous. CBL's and Pennsylvania Real Estate's actually look pretty safe. But decent financials don't automatically make for a great investment.

The retail REIT story is bigger than just what the numbers show us -- there's almost no demand for new shopping malls. Over the last decade, REITs have become the dominant owners of malls, which leaves little room for external growth.

Instead, these companies will likely be forced to rely on internal growth like increased revenues from each location via higher tenant rents. Unfortunately, as shoppers trend more and more toward a digital shopping experience, that might not work out very well for these specialty REITs.

While some experts think that brick-and-mortar consolidation will ultimately benefit malls, this Fool doesn't see that as a sustainable long-term investment. If you're looking for a smarter place to put your money, click here to read our special free report about The Stocks Only the Smartest Investors Are Buying.