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.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers

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.

Related Articles
  1. Investing

    How to Ballast a Portfolio with Bonds

    If January and early February performance is any guide, there’s a new normal in financial markets today: Heightened volatility.
  2. Stock Analysis

    Performance Review: Emerging Markets Equities in 2015

    Find out why emerging markets struggled in 2015 and why a half-decade long trend of poor returns is proving optimistic growth investors wrong.
  3. Investing News

    Today's Sell-off: Are We in a Margin Liquidation?

    If we're in market liquidation, is it good news or bad news? That party depends on your timeframe.
  4. Investing News

    Bank Stocks: Time to Buy or Avoid? (WFC, JPM, C)

    Bank stocks have been pounded. Is this the right time to buy or should they be avoided?
  5. Stock Analysis

    Why the Bullish Are Turning Bearish

    Banks are reducing their targets for the S&P 500 for 2016. Here's why.
  6. Stock Analysis

    How to Find Quality Stocks Amid the Wreckage

    Finding companies with good earnings and hitting on all cylinders in this environment, although possible, is not easy.
  7. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  8. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  9. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  10. Investing News

    What You Can Learn from Carl Icahn's Mistakes

    Carl Icahn has been a stellar performer in the investment world for decades, but following his lead these days could be dangerous.
RELATED FAQS
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center