Shareholders of Real Estate Investment Trusts (REITs) have to deal with a growing number of companies who have announced plans to pay dividends with shares instead of cash. Although some investors might be a little annoyed with this decision, this action allows the companies to retain cash, the most important asset to have when credit contracts. The practice also forces shareholders to reinvest in the company, at a price that is presumably at the bottom, and lowering an investors average cost.

IN PICTURES: Vacation Savings Tips

One of the reasons that investors are attracted to the REIT sector its a steady source of income in the form of dividends, as REITs are required to pay out a minimum of 90% of their taxable income to shareholders. (To learn more about these investment securities, read What Are REITs?)

In January 2009, when Simon Property Group (NYSE:SPG) released earnings for the fourth quarter, it announced a $0.90 dividend to be paid in a combination of stock or cash, with the maximum cash to be paid by the company limited to 10% of $0.09 per share. Shareholders were allowed to choose either all cash or all stock, with the actual cash amount to be pro-rated based on how many investors chose cash. Results of the vote were released last week, and the vast majority elected to receive cash. The end result was Simon paying out $20.8 million in cash and around 5.5 million shares.

The decision by management was the best course for the company, as it estimated that it would retain nearly $925 million of extra cash in 2009 if it elected to do the same combination payment for the full year.

Vornado Realty Trust (NYSE:VNO) also made a similar decision when it paid its most recent dividend. The company used a higher cash amount of 40%, and ended up paying out $59 million as a cash dividend, and around 2.8 million shares.

Some object to this type of payout arguing that the arrangement constitutes dilution of existing shareholders. While this is technically correct, the dilution is slight and short term. Many of these REITs are down 50% from their highs and if the retention of cash leads to their long-term survival then it is a necessary evil, and shareholders will be happy in the end.

UDR (NYSE:UDR) instituted the cash/stock option for its special dividend payable in January, and paid $44 million in cash and approximately 11.4 million shares in stock. However, when UDR declared its first quarter of 2009 dividend, it made no mention of a cash/stock option and will presumably pay it in all cash.

There are worse things than getting paid a dividend in stock rather than cash, as many REITs are cutting or not paying one at all. Developers Diversified Realty (NYSE:DDR) didn't pay a dividend in the fourth quarter of 2008, and then cut the first quarter of 2009 dividend to $ 0.20, with a maximum of 10% in cash.

General Growth Properties (NYSE:GGP) suspended its dividend payments in October 2008, and is hovering near bankruptcy as it negotiates with its bondholders and other creditors.

While it may be upsetting to receive a piece of paper rather than cash at dividend time for REIT shareholders, it is probably the best course for the companies during a time when cash is king, and there is an uncertain storm ahead for the industry.

Be sure to check out the answer to our frequently asked question Which is better a cash dividend or a stock dividend? to learn more about the advantages and disadvantages of each type of distribution.

Related Articles
  1. Stock Analysis

    Analyzing Altria's Return on Equity (ROE) (MO)

    Learn about Altria Group's return on equity (ROE) and analyze net profit margin, asset turnover and financial leverage to determine what is causing its high ROE.
  2. Investing News

    Icahn's Bet on Cheniere Energy: Should You Follow?

    Investing legend Carl Icahn continues to lose money on Cheniere Energy, but he's increasing his stake. Should you follow his lead?
  3. Stock Analysis

    Analyzing Google's Return on Equity (ROE) (GOOGL)

    Learn about Alphabet's return on equity. How has its ROE changed over time, how does it compare to its peers and what factors are driving ROE for the company?
  4. Investing News

    Is Buffett's Bet on Oil Right for You? (XOM, PSX)

    Oil stocks are getting trounced, but Warren Buffett still likes one of them. Should you follow the leader?
  5. Investing News

    Chipotle Served with Criminal Probe

    Chipotle's beat muted expectations and got a clear bill from the CDC, but it now appears that an investigation into its E.coli breakout has expanded.
  6. Stock Analysis

    Analyzing Sprint Corp's Return on Equity (ROE) (S)

    Learn about Sprint's return on equity. Find out why its ROE is negative and how asset turnover and financial leverage impact ROE relative to Sprint's peers.
  7. Stock Analysis

    Why Alphabet is the Best of the 'FANGs' for 2016

    Alphabet just impressed the street, but is it the best FANG stock?
  8. Investing News

    A 2016 Outlook: What January 2009 Can Teach Us

    January 2009 and January 2016 were similar from an investment standpoint, but from a forward-looking perspective, they were very different.
  9. Mutual Funds & ETFs

    3 Vanguard Equity Fund Underperformers

    Discover three funds from Vanguard Group that consistently underperform their indexes. Learn how consistent most Vanguard low-fee funds are at matching their indexes.
  10. Investing News

    Alphabet Earnings Beat Expectations (GOOGL, AAPL)

    Alphabet's earnings crush analysts' expectations; now bigger than Apple?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
Trading Center