Technical Review - REITs Continue Their High Yielding Ways

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Jan 16, 2013, 08:45 ET

LONDON, January 16, 2013 /PRNewswire/ --

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Diversified real estate investment trusts have been some of the most stable and high dividend yielding stocks available. In fact, the number of companies that raised dividends in 2012 was the highest in over a decade. Housing market optimism could lift mortgage focused trust dividends even higher while improving capital spending could help spark broader commercial real estate activity.

One such company is MFA Financial Inc.⁽¹⁾ (NYSE:MFA) which has a dividend yield of 9.04%. It has a cash dividend coverage ratio of 10.4%, indicating that the company generates enough cash from operations to be able to sustain its dividend payment to shareholders. However, the king of dividend in the diversified REITs industry is Annaly Capital Management Inc.⁽²⁾ (NYSE: NLY) with its dividend yield of 12.27%. Annaly is the first publicly traded Mortgage REIT.

Those impressive yields have come under fire in recent weeks though. A regulatory proposal that would affect the rate at which dividends are taxed could have the biggest impact on trusts and investors. Prior to 2013, most investors could pay a maximum of 15% on dividend income. A fiscal cliff compromise lifted that maximum to 20% for earners above $450,000. The proposed law before the compromise would remove preferential treatment for dividends and send rates soaring to the standard income tax rates of around 43%. The proposal was shelved when the fiscal cliff crisis was temporarily delayed but lawmakers on both sides have resumed their discussions and many tax related questions remain unanswered.

Presumably, trusts would be more likely to return cash to investors in the form of share buybacks over dividends in the event of a substantial tax hike, though it remains to be seen how this will play out.

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