These 3 REITs Are About To Plummet As Dividend Cuts Loom​

With cash flow growth slowing, these three REITs have a high risk of cutting their dividends in the near future. Dump these stocks now before they cut their dividend and their stock prices plummet.

The recent market correction has all of us questioning our stock picks. The REIT sector has been hit especially hard, and since values peaked in January of this year many of us are sitting underwater on REIT holdings that were purchased in the second half of 2014 or first half of this year. With continued volatility expected in what may turn out to be a mostly sideways market for quite a while, you can improve your portfolio results by weeding out those REITs that do not bring any extra growth potential to the table.

A primary criteria for a REIT that I will recommend is a history of dividend growth. I then analyze the company to make sure that the payout growth rate can continue at a similar pace or even accelerate. In all market conditions, but especially in times like these, a growing dividend provides two important benefits. First, there is the obvious result of a growing cash flow stream. I like to view my REITs as investments that give me a raise at least once a year. A second benefit is that a growing dividend should eventually drag the share price higher. It’s a basic math if a REIT that yields 6% increases the dividend by 10%, the share price must go up by the same 10% to keep the yield at the same level. The result is a 10% share price gain plus the 6% yield for a 16% total return. In the short to intermediate term the market ignores this basic, math based fact, but in the longer term a rising dividend will propel a share price higher.

So the REITs to sell or avoid in the current market are the ones that are not increasing dividends or have slowing cash flow growth rates. These are the companies that are most likely to be forced into dividend reductions if the economy gets worse or higher interest rates actually happen. Here are three that you will want to re-evaluate if they reside in your portfolio.

W.P. Carey Inc (WPC) has been a great long-term yield plus dividend growth story. Historically, the dividend has been meaningfully increased every quarter. However, something has changed. The last three dividends came with tiny and shrinking increases of $0.0025, $0.0015, and $0.0010. Yes, that is a one-tenth of a penny increase on a $0.95 quarterly dividend. Yet management has been silent on the fact that cash flow per growth has stalled and the current string of micro dividend increases are more to keep a record of growth intact rather than provide a real value for shareholders. The company has provided no guidance on either the reasons for the cash flow stagnation or when/if growth is again expected to resume.

Don’t be tempted by the over 9% yield of Senior Housing Properties Trust (SNH). The primary strike against SNH is that it has not increased its dividend since October 2012. Even though the company reported 4% FFO per share growth for the second quarter, the current dividend is still 88% of FFO, leaving no room for an increase. The REIT healthcare sector is filled with well-managed companies that have produced nicely growing dividends for investors. A better alternative to SNH is Omega Healthcare Investors Inc (OHI), which just announced its 13th consecutive quarterly dividend increase.

Highwoods Properties Inc (HIW) holds the dubious honor of being the REIT in my database that has gone the longest without a dividend increase. The company has paid the same $0.425 quarterly dividend since it went public in 1994. The current 4% dividend yield is safe and well covered by FFO per share. But if a company can’t or won’t figure out a way to increase the rewards paid to shareholders, what’s the point of owning the stock. A not yet growing dividend REIT in a similar property sector that is on my radar is Columbia Property Trust Inc (CXP). Columbia is a company that is working hard to reposition its portfolio and eventually start to grow the dividend rate. CXP yields 4.8%.

Finding companies that regularly increase their dividends is the strategy that I use myself to produce superior results, no matter if the market moves up or down in the shorter term. The combination of a high yield and consistent dividend growth in stocks is what has given me the most consistent gains out of any strategy that I have tried.