Real estate stocks: A wedge in the dividend yield totem

Real estate stocks: A wedge in the dividend yield totem

12-01-2021 | Insight
Dividend yield is often seen as a crucial feature of investment strategies focusing on listed real estate stocks. But putting too much emphasis on this variable can be counterproductive.
  • Folmer Pietersma
    Portfolio Manager
  • Frank Onstwedder
    Global Equity director

Speed read

  • Dividend is often seen as a key metric for real estate stock selection
  • But focusing solely on dividend yield leads to suboptimal performance
  • Distinguishing REITs from non-REITs is also essential

Given the relatively stable nature of rental flows, property companies often tend to distribute a relatively high and stable share of their profits in dividends, making their stocks an attractive option for those investors looking for a consistent source of income. In fact, Robeco research shows that dividends would have accounted for roughly half of the total return achieved, over the past 20 years, by real estate stocks included in the S&P Developed Broad Market Index (BMI).

This explains why so many investors consider dividend yield as the single most important investment criterion, when considering this type of company. But is that really the case? Or, put differently, do real estate stocks exhibiting high dividend yields really achieve higher total returns in the long run? Our research suggests that selecting property stocks based on their dividend yield turns out to be shortsighted and that higher dividend yields do not necessarily lead to higher investment results.

Indeed, recent Robeco simulations show that while a strategy focusing on high dividend yield could have worked within the broader real estate sector over the last 20 years, returns would have been heavily concentrated in the first few years. Such a strategy would also have resulted in sharper drawdowns and higher volatility.

Stay informed on Quant investing with monthly mail updates
Stay informed on Quant investing with monthly mail updates

REITs-only versus non-REITs

More specifically, we found that a REIT-only high dividend yield (HDY) strategy, one which invests solely in listed real estate investment trusts (REITs) and avoids other types of real estate stocks (non-REITs), would have underperformed a standard equally-weighted allocation to the broader real estate sector.

REITs are companies that focus on developing and renting a portfolio of properties while benefiting from specific favorable tax regimes in many countries, provided they distribute most of their earnings. Meanwhile, a HDY strategy focused on non-REITs would have consistently outperformed the broader real estate universe. But this outperformance would have largely been regionally-biased and dependent on the specific timing of some positions in certain countries.

A high dividend yield may not always reflect bright company prospects

These results confirm that dividend yield should not be taken as a standalone selection variable and that a lower one does not necessarily mean lower expected returns. The main reason is that a high dividend yield results from the combination of a stated current dividend (numerator) and a share price (denominator), integrating market views on future earnings and dividend growth. 

As a consequence, a high dividend yield may not always reflect bright company prospects. For example, it could be the temporary outcome of a sharp drop in the stock price triggered by a worsening outlook for the business.

Also, high dividend payouts may not always reflect sound financial management. To lure investors, management teams might be tempted to increase a company’s financial leverage, and by making use of often low debt financing costs, improve its earnings and therefore dividends. High dividend payouts might also come at the expense of critical maintenances. Finally, they might also be the outcome of one-off assets sales, and therefore unsustainable over the long run.

Dividend yield as an output, not a driver

The Robeco Sustainable Property strategy aims to capture opportunities offered by oft-underappreciated long-term cash-flow generation in the property sector. As such, our analysis focuses on property companies’ ability to generate sustainable free cashflows over the longer term. From this perspective, the resulting dividend yield of our portfolio is an output – not a driver – of our investment process. As a consequence, this resulting dividend yield can be lower than the strategy’s benchmark.

Yet as our research shows, higher dividend yields do not necessarily lead to higher long-term returns. So, while we do acknowledge the importance of dividends and dividend yield for property investors – the fact that a HDY approach appears to work within non-REITs confirms they should not be ignored – we believe it should not be overstated.

Subjects related to this article are:

Important information

The Robeco Capital Growth Funds have not been registered under the United States Investment Company Act of 1940, as amended, nor or the United States Securities Act of 1933, as amended. None of the shares may be offered or sold, directly or indirectly in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act of 1933, as amended (the “Securities Act”)). Furthermore, Robeco Institutional Asset Management B.V. (Robeco) does not provide investment advisory services, or hold itself out as providing investment advisory services, in the United States or to any U.S. Person (within the meaning of Regulation S promulgated under the Securities Act).

This website is intended for use only by non-U.S. Persons outside of the United States (within the meaning of Regulation S promulgated under the Securities Act who are professional investors, or professional fiduciaries representing such non-U.S. Person investors. By clicking “I Agree” on our website disclaimer and accessing the information on this website, including any subdomain thereof, you are certifying and agreeing to the following: (i) you have read, understood and agree to this disclaimer, (ii) you have informed yourself of any applicable legal restrictions and represent that by accessing the information contained on this website, you are not in violation of, and will not be causing Robeco or any of its affiliated entities or issuers to violate, any applicable laws and, as a result, you are legally authorized to access such information on behalf of yourself and any underlying investment advisory client, (iii) you understand and acknowledge that certain information presented herein relates to securities that have not been registered under the Securities Act, and may be offered or sold only outside the United States and only to, or for the account or benefit of, non-U.S. Persons (within the meaning of Regulation S under the Securities Act), (iv) you are, or are a discretionary investment adviser representing, a non-U.S. Person (within the meaning of Regulation S under the Securities Act) located outside of the United States and (v) you are, or are a discretionary investment adviser representing, a professional non-retail investor. Access to this website has been limited so that it shall not constitute directed selling efforts (as defined in Regulation S under the Securities Act) in the United States and so that it shall not be deemed to constitute Robeco holding itself out generally to the public in the U.S. as an investment adviser. Nothing contained herein constitutes an offer to sell securities or solicitation of an offer to purchase any securities in any jurisdiction. We reserve the right to deny access to any visitor, including, but not limited to, those visitors with IP addresses residing in the United States.

This website has been carefully prepared by Robeco. The information contained in this publication is based upon sources of information believed to be reliable. Robeco is not answerable for the accuracy or completeness of the facts, opinions, expectations and results referred to therein. Whilst every care has been taken in the preparation of this website, we do not accept any responsibility for damage of any kind resulting from incorrect or incomplete information. This website is subject to change without notice. The value of the investments may fluctuate. Past performance is no guarantee of future results. If the currency in which the past performance is displayed differs from the currency of the country in which you reside, then you should be aware that due to exchange rate fluctuations the performance shown may increase or decrease if converted into your local currency. For investment professional use only. Not for use by the general public.

I Disagree