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.

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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.

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