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REITs: A Dividend Growth Investment?

Thus far in 2015, none of the 15 U.S. focused Real Estate Investment Trust (REIT) ETFs has outperformed the S&P 500 index. S&P Capital IQ thinks the underperformance stems from investor concerns that higher interest rates will limit the appeal of these bond alternatives. However, recent research from SNL Financial reveals that REITs are hiking dividends at a rapid clip.

Last week, Chris Hudgins, a real estate analyst for SNL, noted that 101 (45%) of U.S. publicly traded REITs and property companies in his database have raised dividends at least once in the first 10 months of 2015. Hudgins noted this is up from 88 and 92 companies that increased dividends at this point in 2013 and 2014, respectively.

This is a pleasant surprise for many investors. The case against REITs is that their relatively high dividend yields (for stocks) will be less appealing as the yield on the 10-year Treasury moves higher as the Federal Reserve prepares to initiate a rate-hike sequence. Yet as Hudgins notes, 12 U.S. REITs and property companies raised their dividends in October, up from seven in September.

One such company is Simon Property Group (SPG), which raised its quarterly dividend in late October by 3.2% to $1.60. SPG raised its dividend during all four quarters of 2015 and its annual dividend of $6.40 is 56% higher than it was three years ago. SPG has a 3.3% dividend yield, relative to the 3.5% average yield for its S&P 1500 retail REIT peers.

The 7.9% quarterly dividend increase for Crown Castle (CCI ) in October elevated the wireless-focused specialized REIT's dividend yield to 4.2%, higher than its peers' 3.9%. CCI began paying dividends in February 2014 as it converted to a REIT, but in 18 months its quarterly dividend has nearly tripled to $0.89 per share.  Meanwhile, diversified REIT Duke Realty (DRE) raised its dividend 5.9% in October.

CCI, DRE and SPG were all among the top-25 holdings for iShares US Real Estate ETF (IYR) at the end of October. The ETF, which has a 0.43% expense ratio, has $4.6 billion in assets spread across specialized REITs (24% of assets), retail REITs (20%), residential REITs (15%), office REITs (11%), and other. IYR has a 3.7% yield.

Vanguard REIT ETF (VNQ), the largest REIT ETF with $26 billion in assets, has large stakes in SPG and DRE. It has more exposure to retail and residential REITs, but less exposure to specialized REITs. It has a 0.12% expense ratio and a 3.9% yield.

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