The last few years have been a great time to be a commercial real estate investor. After virtually imploding during the credit crisis and global recession, the sector has bounced back strongly as new capital flooded back into the market. Funds like the iShares Dow Jones US Real Estate (ARCA:IYR) have seen tremendous gains as investors have sought exposure to inflation-fighting hard assets and strong dividend yields. Those gains could be even greater in the months ahead. According to industry experts, real estate investment trusts (REITs) are poised to deliver a year of impressive dividend increases. For those investors seeking income, the record increases in dividends are just another reason why REITs should be part of your income portfolio.

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Higher Payouts Coming
At their core, REITs are a type of company that hold physical properties, or property mortgages, and then generate revenue from rent payments. In order to qualify for federal tax breaks, REITs are required to pay out a large percentage (90%) of their net income to shareholders through dividends and those distributions are improving.

After cutting dividends in 2009, due to balance sheet repairs and leverage reductions, REITs are back on track to grow distributions once again. According to SNL Financial, 48 United States REITs had increased dividends so far this year. That's more than the entire number in 2010. What's more impressive is that the increases occurred across every property type, with multi-family, hotel and healthcare subsectors leading the way. The trio of Cedar Realty (NYSE:CDR), Corporate Office Properties Trust (NYSE:OFC) and Piedmont Office Properties (NYSE:PDM) were the only three U.S. REITs to decrease their dividends this year. REITs that raised their quarterly dividends in 2011 was 35%.

However, the analysts at SNL estimate that there will be more dividend growth coming this year. The group projects that average funds from operations growth for 2012 and 2013 will range between 8.2 and 8.3%. This will allow REITs to be able to pay higher dividends as year-over-year cash available for distribution grows. Additionally, average dividend payout ratios are well below historic norms and leverage in the sector remains low.

Add this to the improving rental/vacancy rates, consumer sales and generally improving economy, and you have a recipe for continued dividend growth in the years ahead.

SEE: The Basics Of REIT Taxation

Adding in Those Rising Distributions
Given the potential for higher yields down the road, investors may want to add a dose of commercial real estate to a portfolio. The broad based Vanguard REIT Index ETF (ARCA:VNQ) still remains one of the best and cheapest options for investors. Charging a rock-bottom 0.10% in expenses, the exchange-traded fund (ETF) spreads its approximately $24 billion in assets across 111 different REITs. Top holdings include hospital owner Ventas (NYSE:VTR) and apartment owner Equity Residential (NYSE:EQR). The Vanguard ETF yields around 3.27%, but should see that distribution grow as more REITs continue to up their pay-outs. Likewise, the iShares Cohen & Steers Realty Majors (ARCA:ICF) focuses on some of the biggest and strongest REIT names.

According to SNL, the multi-family and hotel subsector saw the most dividend increases thus far this year. Driven by the poor residential housing market and lack of credit, more Americans have been forced to rent instead of purchasing a house. That's benefited REITs in the sector like Apartment Investment and Management Company (NYSE:AIV), which increased its dividend 50% this year. For investors, the iShares FTSE NAREIT Residential (NYSE:REZ) makes a great way to play that subsector's rising dividend payments.

Finally, for those investors looking for the dividend champ of the year, full-scale and luxury hotel owner LaSalle Hotel Properties (NYSE:LHO) has the distinction of upping its pay out by the most so far. The hotel REIT hiked its dividend by almost 82%. The firm represents an interesting turnaround story and currently yields 2.9%.

SEE: The Power Of Dividend Growth

The Bottom Line
Since the depths of the global recession, the commercial real estate sector has seen a huge increase in gains and attention. However, the sector still offers an opportunity. Improving economic conditions and rising rent rates are helping push the high dividends even higher. The previous picks are a great way to play those higher payouts.

At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.



Tickers in this Article: VNQ, REZ, AIV, LHO

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