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Avoid Sucker Yields, Buy REITs With Growing Dividends

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Truth or False: High dividend yield equates to high total returns.

If you answered True you could be in for a bumpy ride.

It’s actually a common misconception that a high yield is a central element to the calculation of total returns , and the facts are clearly justified, a dividend yield that is considerably higher than other stocks could ultimately lead to a depressed share price.

I know, it’s awfully tempting not to swing for the fences when you see a double-digit yielding flashing “BUY ME”, but as I explained,

This chase for yield in the stock market leads to the same thing that all such chasing leads to – impulsively reacting to dividend quantity over dividend quality.

That’s what’s frequently referred to as a “sucker yield” and companies that fall under that definition usually have unpredictable and unreliable earnings histories with unsafe dividend payouts.

The allure for “sucker yield” stocks is seemingly hypnotic as these impulsively promising investments are quite tempting, and most of the time the “chase for yield” turns into a sucker bet that ultimately leads to principal loss and ultimately “fools’ gold”.

As a true measure of safety, it's critical that investors analyze the underlying safety of the dividend, the ability for the dividend to grow, and the overall merit of the stock.

The important indicator of dividend power isn’t so much high yield but high overall quality, which you can discover through the history of dividends, which should increase over time.

Looking into the rear view mirror can provide a clear snapshot of corporate performance and if there's a previous dividend cut it could also suggest management is not successfully controlling risk. It's also important to tune into the company's "real time" performance and as Josh Peters explains in The Ultimate Dividend Playbook,

“the safest dividend is the one that’s just been raised”.

REITs That Have Increased Dividends In 2016

In my monthly newsletter, Forbes Real Estate Investor, I maintain a research lab that consists of around 100 U.S. REITs. While evaluating each security I take a close look at the overall health of the dividend, including both historical and future prospects for growth. Also, I weigh in on the most recent evidence that the dividend is growing as that implies that the REIT is durable and that management is disciplined.

Although dividend safety is not the only indication that a stock is healthy, a strong record of dividend growth often suggests that the earnings stream (of adjusted funds from operations in REIT language) can be relied upon over a series of months and years. So far this year there has been 15 REITs that have increased their dividends by at least 10%:

There are 17 REITs that have increased their dividend (in 2016) by at least 5% and less than 10%%:

There are 13 REITs that have increased their dividend (in 2016) by 5% or less:

Recent dividend increases provide terrific indicators since it tells you that the earnings potential for the company is sound. Dividends are more than mere information; they provide insight that investors can use to make successful investments. Always be careful when you are simply chasing yield, because you could end up being the "sucker". For more information, check out my newsletter HERE.

Brad Thomas owns shares in O, DLR, VTR, HTA , STAG, GPT, ROIC, HCN, OHI, LXP, KIM, WPC, DOC, EXR, MYCC, BX, TCO, SKT, UBA, STWD, CONE, BRX, CLDT, HST, APTS, FPI, CORR, NHI, CCP, WSR, CTRE, WPG, KRG, SNR, LADR, HCP .

Source: SNL Financial.

Brad Thomas is editor of Forbes Real Estate Investor and writes for Forbes.com. He is the co-author of  The Intelligent REIT Investor: The Definitive Roadmap For Investing In Real Estate Securities and he is writing a book, The Trump Factor, about presidential candidate Donald J. Trump.