Larry Swedroe on REITs

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Random Walker
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Larry Swedroe on REITs

Post by Random Walker » Fri May 26, 2017 7:22 am

http://www.etf.com/sections/index-inves ... ture-reits

REITs are currently quite expensive. Also their correlations to stocks and bonds are perhaps much higher than most of us think now.

Dave

Valuethinker
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Re: Larry Swedroe on REITs

Post by Valuethinker » Fri May 26, 2017 7:47 am

Random Walker wrote:http://www.etf.com/sections/index-inves ... ture-reits

REITs are currently quite expensive. Also their correlations to stocks and bonds are perhaps much higher than most of us think now.

Dave
Thank you.

That's a really interesting paper (better: I agree with it! ;-)).

But it does underline what is different. Valuation.

I see structural banana skins out there (Shopping Malls! Residental RE for rent) but also interesting to see there is a quantitative argument, too.

The treatment in the linked paper as to unquoted REITs is also interesting. No safe haven. International RE is less overvalued, but not intrinsically attractive.
Last edited by Valuethinker on Fri May 26, 2017 7:48 am, edited 1 time in total.

Angst
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Re: Larry Swedroe on REITs

Post by Angst » Fri May 26, 2017 7:48 am

Gee, it seems like Larry sure has become prolific of late. It's as if he suddenly came upon a whole lot of extra free time to devote to writing...
:oops:

rai
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Re: Larry Swedroe on REITs

Post by rai » Fri May 26, 2017 7:59 am

are we supposed to chuck our investment plan after ever new study or stay the course? :confused
"Life is what happens to you while you're busy making other plans" - John Lennon. | | "You say that money, isn't everything | But I'd like to see you live without it." - Silverchair

Crisium
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Re: Larry Swedroe on REITs

Post by Crisium » Fri May 26, 2017 8:04 am

rai wrote:are we supposed to chuck our investment plan after ever new study or stay the course? :confused
Stick to the plan.

From article:
At the very least, investors should be aware that REITs are now more vulnerable to an increase in interest rates and/or an economic contraction, and it’s important to stick to your plan, rebalancing along the way.

If you have been thinking of increasing your allocation to REITs to generate more cash flow, this should serve as a cautionary warning.
I don't see any advice to decrease or abandon REITs if they are in your plan. It looks like advice not to increase the REIT allocation in your plan.

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packer16
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Re: Larry Swedroe on REITs

Post by packer16 » Fri May 26, 2017 8:26 am

Although the article is valid in general, I think the biggest issue is the generality of the results. This is similar to saying the market is to expensive & therefore I will not invest. The details are always more revealing IMO. Today you can buy a NNN REIT (a REIT who owns property & long-term leases (equivalent to a long term bonds)) with a dividend yield of 6.2%, rent increases of 2% per year & continues to make accretive acquisitions with cap rates in the 7 to 8% range. The REIT is diversified and invests in commercial, industrial, medical and restaurant properties to mostly investment grade leasers. The advantage of this approach is you get the real estate exposure to equity that Larry speaks of & a bond portfolio of the leasers which acts more like bonds. The historical returns have been in the low teens per year. The REIT is Broadstome Net Lease and is probably the best real estate/fixed income investment I know of at today's prices. As to performance of NNN's lease firm during the great recession check out O or NNN as the bond-like characteristics overcame the equity characteristics during the downturn.

Packer
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Random Walker
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Re: Larry Swedroe on REITs

Post by Random Walker » Fri May 26, 2017 8:27 am

rai wrote:are we supposed to chuck our investment plan after ever new study or stay the course? :confused
Tough call! For the most part, the fail safe is to stick to the plan. But there are times changes make good sense. One needs a basic overall framework to work with. For me that framework is modern portfolio theory: mixing noncorrelating investments in a portfolio to maximize portfolio efficiency. When I look at a new potential addition, I look at expected return, correlations, when correlations rise and fall, volatility, and of course costs. Over time academic finance and the investing landscape evolves. It can make sense to rarely substitute one investment for another in a portfolio. For example in my case, based mainly on the fact that REIT returns are driven by beta, size, value, I've substituted REITs in my portfolio with what I believe are lower correlated investments with higher expected returns: alternative lending, Reinsurance, Momentum. Also got rid of CCFs. Not possible to do this without being subjected to the criticism of market timing or falling for a new fad. But if one has a strong rationale, then probably should proceed.

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Re: Larry Swedroe on REITs

Post by sailor18 » Fri May 26, 2017 9:03 am

I purchased some commodities and QSPIX at Larry's suggestion and am still waiting for the up portion of those cycles to materialize.

kosomoto
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Re: Larry Swedroe on REITs

Post by kosomoto » Fri May 26, 2017 9:10 am

Um, REITs aren't overvalued at all.

Their price to book ratio is LOWER than their ten year average and their FFO valuation is just barely above the average level. If anything, REITs are in way better shape fundamentally than the broad market.

https://ibb.co/dQviXa

https://ibb.co/gktsQv

NiceUnparticularMan
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Re: Larry Swedroe on REITs

Post by NiceUnparticularMan » Fri May 26, 2017 9:34 am

So REITs are not the same thing as common stocks, and I see no reason to believe the factors driving the cross-section of common stock returns should apply to REITs. As reported in that article, the large changes in the results of the factor regressions for REITs for different periods only confirms for me the very idea of doing those regressions for REITs makes no sense.

Generally I don't really care about valuations outside of vaguely for planning purposes (as in you might need more money to generate a certain sustainable rate of consumable return if the valuations in your portfolio are higher). But this article just underscored for me that if you are interested in REIT valuations, you have to use valuation methods specific to REITs, and not confuse them with common stocks.
Last edited by NiceUnparticularMan on Fri May 26, 2017 9:52 am, edited 1 time in total.

avalpert
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Re: Larry Swedroe on REITs

Post by avalpert » Fri May 26, 2017 9:39 am

rai wrote:are we supposed to chuck our investment plan after ever new study or stay the course? :confused
That depends on why you chose your plan in the first place. If, for example, you added REITS because of supposed low correlation to stocks and a new study shows that assumption to be false then yes you should chuck your plan.

This is why it is imperative when determining your plan to also be clear on the assumptions that underlie it, what might overturn those assumptions and what you will do if your assumptions turn out to be false.

There is no virtue in sticking to a plan that was built on a false structure.

Bud
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Re: Larry Swedroe on REITs

Post by Bud » Fri May 26, 2017 9:50 am

kosomoto wrote:Um, REITs aren't overvalued at all.

Their price to book ratio is LOWER than their ten year average and their FFO valuation is just barely above the average level. If anything, REITs are in way better shape fundamentally than the broad market.

https://ibb.co/dQviXa

https://ibb.co/gktsQv
This...

REITs provide diversification and add value to a portfolio when used wisely.

NiceUnparticularMan
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Re: Larry Swedroe on REITs

Post by NiceUnparticularMan » Fri May 26, 2017 9:50 am

avalpert wrote:
rai wrote:are we supposed to chuck our investment plan after ever new study or stay the course? :confused
That depends on why you chose your plan in the first place. If, for example, you added REITS because of supposed low correlation to stocks and a new study shows that assumption to be false then yes you should chuck your plan.
Just to be clear, it could well be that the correlation between REITs and common stocks is a variable (I consider that a near certainty). So I would say this study should give you reason for concern if your assumption was that REITs would ALWAYS have correlations with common stocks below a certain low threshold. If you were only hoping they would sometimes have somewhat lower correlations with common stocks, then this study might have much less impact on your planning.

That said, I don't disagree that in general, we should be open to true falsification of our assumptions, and that being clear on our assumptions is a critical step in that process.

avalpert
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Re: Larry Swedroe on REITs

Post by avalpert » Fri May 26, 2017 9:53 am

NiceUnparticularMan wrote:
avalpert wrote:
rai wrote:are we supposed to chuck our investment plan after ever new study or stay the course? :confused
That depends on why you chose your plan in the first place. If, for example, you added REITS because of supposed low correlation to stocks and a new study shows that assumption to be false then yes you should chuck your plan.
Just to be clear, it could well be that the correlation between REITs and common stocks is a variable (I consider that a near certainty). So I would say this study should give you reason for concern if your assumption was that REITs would ALWAYS have correlations with common stocks below a certain low threshold. If you were only hoping they would sometimes have somewhat lower correlations with common stocks, then this study might have much less impact on your planning.

That said, I don't disagree that in general, we should be open to true falsification of our assumptions, and that being clear on our assumptions is a critical step in that process.
Yes, I haven't looked at this study nor others on REIT correlations to stocks nor do I have a dedicated holding of REITS - it was just an example of a potential circumstance.

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nedsaid
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Re: Larry Swedroe on REITs

Post by nedsaid » Fri May 26, 2017 10:13 am

After having trimmed my REITs back 20% over the last 2-3 years, I am keeping what I have but I am not buying any more.
A fool and his money are good for business.

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Re: Larry Swedroe on REITs

Post by aristotelian » Fri May 26, 2017 11:46 am

Crisium wrote:
I don't see any advice to decrease or abandon REITs if they are in your plan. It looks like advice not to increase the REIT allocation in your plan.
That is because Swedroe is smart enough not to make a prediction in case he turns out to be wrong.

I would not change your plan due to one article, but it is possible that it was not a good plan to begin with and the article could be explaining why. :)

Day9
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Re: Larry Swedroe on REITs

Post by Day9 » Fri May 26, 2017 1:23 pm

Reminder that one reason Mr Swedroe prefers other funds to Vanguard Small Cap Value (VBR) is that VBR has too high an allocation to REITs.
I'm just a fan of the person I got my user name from

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DaftInvestor
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Re: Larry Swedroe on REITs

Post by DaftInvestor » Fri May 26, 2017 1:33 pm

OP (Dave/RandomWalker) - I noticed you post nearly every new Larry Swedroe ETF-site post - are you sure you aren't him in disguise? :)

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patrick013
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Re: Larry Swedroe on REITs

Post by patrick013 » Fri May 26, 2017 1:48 pm

Everything is so overvalued the DJIA looks somewhat still buyable.

But when I look at REIT's I look at 2 things. An older REIT that has
low growth but steady income. And a growing REIT with large
increases in payouts that has dividend growth and price appreciation
regardless of current interest rates or market condition. Properties
and Occupancy Rates both growing quite well.

VG's REIT has before tax yield of 3.9% and PEG ratio over 2.
age in bonds, buy-and-hold, 10 year business cycle

Random Walker
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Re: Larry Swedroe on REITs

Post by Random Walker » Fri May 26, 2017 2:13 pm

Daftinvestor,
Pretty sure I'm not him :-) just think his essays are some of the best info I can find. I've become a Factor junkie over the years, so there may be some confirmation bias leaking out though :-)

Dave

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DaftInvestor
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Re: Larry Swedroe on REITs

Post by DaftInvestor » Fri May 26, 2017 2:41 pm

Random Walker wrote:Daftinvestor,
Pretty sure I'm not him :-) just think his essays are some of the best info I can find. I've become a Factor junkie over the years, so there may be some confirmation bias leaking out though :-)

Dave
Please keep them coming! It is especially useful when you provide us with a couple of sentence summary (like you did above) so we can decide whether or not we want to read the full article.

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Re: Larry Swedroe on REITs

Post by MindTheGAAP » Fri May 26, 2017 3:13 pm

Some of these REIT articles made me re-examine what was under the hood of some of my MFs - mainly my Small Cap Index fund (I hedge on the value premium aspect and stick with the middle of the road fund) - I noticed they had some 12% of the fund in the Real Estate space (per Morning*). At that realisation, I've pulled back on my REIT allocation since I had more than I'd previously allowed for - and the ER% is cheaper on my VSMAX when compared with VGSIX. It's also an added benefit that it'll be one less fund in the portfolio to allocate to/ bother with.

Just my $0.02, I'm not expecting anyone to follow me into the fire!
"One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute" - William Feather

KyleAAA
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Re: Larry Swedroe on REITs

Post by KyleAAA » Fri May 26, 2017 5:03 pm

Has the real return on REIT dividends really averaged -2%? S&P disputes that, at least since 2000. What is the source of that data?

https://us.spindices.com/documents/rese ... nload=true

lazyday
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Re: Larry Swedroe on REITs

Post by lazyday » Fri May 26, 2017 6:50 pm

KyleAAA wrote:Has the real return on REIT dividends really averaged -2%? S&P disputes that, at least since 2000. What is the source of that data?
Dividends per share have dropped over time.

https://www.researchaffiliates.com/cont ... dology.pdf

My bold:
only 7% of capital expenditures are funded through retained earnings; the remaining 93% are funded through the debt and equity
security markets. As REITs look to upgrade existing properties, or purchase new ones, they access funding sources
by issuing both debt and new shares.
Figure 4 displays real annual DPS since the start of the REIT index, along with a long-term and a shorter-term trend line. The long-term trend line shows an annual reduction in dividends per share of -3.7% per year. Much of the
drop in real DPS comes from the early 1970s, with slower negative growth in more recent times. The shorter-term
trend line shows that since 1990 real DPS payouts have fallen at a slower rate of -2.2% annually. This is the best
estimate of forward dilution (negative growth).

grok87
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Re: Larry Swedroe on REITs

Post by grok87 » Fri May 26, 2017 8:02 pm

kosomoto wrote:Um, REITs aren't overvalued at all.

Their price to book ratio is LOWER than their ten year average and their FFO valuation is just barely above the average level. If anything, REITs are in way better shape fundamentally than the broad market.

https://ibb.co/dQviXa

https://ibb.co/gktsQv
Thanks thats interesting.

I found the quoted van nieuwenbergh research very MEh. Yes everything has all gone up, stocks, bonds, reits so of course they all look correlated over the past 10 years. The key question is- how will things behave going forward?

"Nobody knows nothing." There are no guarantees but the sensible thing to do is to have a portfolio ala swensen of us stocks, international stocks, real estate, treasuries and tips- ie assets that are intrinsically different enough that you have a shot at diversification going forward.

We will only know which of these 5 assets is cheap say 10-20 years from now,ie with 20/20 hindsight. That being said, my money is on tips!
Keep calm and Boglehead on. KCBO.

kosomoto
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Re: Larry Swedroe on REITs

Post by kosomoto » Fri May 26, 2017 8:51 pm

lazyday wrote:
KyleAAA wrote:Has the real return on REIT dividends really averaged -2%? S&P disputes that, at least since 2000. What is the source of that data?
Dividends per share have dropped over time.

https://www.researchaffiliates.com/cont ... dology.pdf

My bold:
only 7% of capital expenditures are funded through retained earnings; the remaining 93% are funded through the debt and equity
security markets. As REITs look to upgrade existing properties, or purchase new ones, they access funding sources
by issuing both debt and new shares.
Figure 4 displays real annual DPS since the start of the REIT index, along with a long-term and a shorter-term trend line. The long-term trend line shows an annual reduction in dividends per share of -3.7% per year. Much of the
drop in real DPS comes from the early 1970s, with slower negative growth in more recent times. The shorter-term
trend line shows that since 1990 real DPS payouts have fallen at a slower rate of -2.2% annually. This is the best
estimate of forward dilution (negative growth).
This analysis is nonsense. The dividend analysis was bizarre, to put it in a nice way. Most dividends are paid out after R&M and capex costs. In fact dividend returns are typically measured as a percentage of AFFO which is essentially free cash flow after capex. Suggesting you would take an addition 2% off the dividend yield for maintenance demonstrates a clear lack of basic accounting knowledge.

There are so many things wrong from the substitution of yield for cap rate, to the Capex assumption, the omission of leverage in the equation and how REIT's are utilizing leverage, replacement costs and so on. This is so bad in fact that I'm amazed it's still posted online.

Nova1967
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Re: Larry Swedroe on REITs

Post by Nova1967 » Mon May 29, 2017 8:37 am

rai wrote:are we supposed to chuck our investment plan after ever new study or stay the course? :confused
Swedroe reminds me of Benjamin Graham, good stuff but very sophisticated, most of us BHs are content keeping a simplified 3 fund approach or maybe some minor tilts.
I don't have a PHD in statistics and I'm not infatuated with fancy colorful charts. As Benjamin Graham would say the results are quite satisfactory.

lazyday
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Re: Larry Swedroe on REITs

Post by lazyday » Mon May 29, 2017 9:51 am

kosomoto wrote:Suggesting you would take an addition 2% off the dividend yield for maintenance demonstrates a clear lack of basic accounting knowledge.
The quote in my post above explains that the 2.2% is removed because "real DPS payouts have fallen ... -2.2% annually".

As I read it, the text about capex is there to explain why REIT real dividend yields fall, not to justify the 2.2% assumption. REITS fund capex by issuing new shares, which dilutes existing shareholders, causing yields to drop over time.

Valuethinker
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Re: Larry Swedroe on REITs

Post by Valuethinker » Mon May 29, 2017 10:19 am

kosomoto wrote:
lazyday wrote:
KyleAAA wrote:Has the real return on REIT dividends really averaged -2%? S&P disputes that, at least since 2000. What is the source of that data?
Dividends per share have dropped over time.

https://www.researchaffiliates.com/cont ... dology.pdf

My bold:
only 7% of capital expenditures are funded through retained earnings; the remaining 93% are funded through the debt and equity
security markets. As REITs look to upgrade existing properties, or purchase new ones, they access funding sources
by issuing both debt and new shares.
Figure 4 displays real annual DPS since the start of the REIT index, along with a long-term and a shorter-term trend line. The long-term trend line shows an annual reduction in dividends per share of -3.7% per year. Much of the
drop in real DPS comes from the early 1970s, with slower negative growth in more recent times. The shorter-term
trend line shows that since 1990 real DPS payouts have fallen at a slower rate of -2.2% annually. This is the best
estimate of forward dilution (negative growth).
This analysis is nonsense. The dividend analysis was bizarre, to put it in a nice way. Most dividends are paid out after R&M and capex costs. In fact dividend returns are typically measured as a percentage of AFFO which is essentially free cash flow after capex. Suggesting you would take an addition 2% off the dividend yield for maintenance demonstrates a clear lack of basic accounting knowledge.

There are so many things wrong from the substitution of yield for cap rate, to the Capex assumption, the omission of leverage in the equation and how REIT's are utilizing leverage, replacement costs and so on. This is so bad in fact that I'm amazed it's still posted online.
From the quotes given it is clear that the authors mean a falling Dividend Per Share from REITs. They've measured it, and it is negative, long run.

How does that square with your critique?

kosomoto
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Re: Larry Swedroe on REITs

Post by kosomoto » Tue May 30, 2017 9:59 pm

Valuethinker wrote:
kosomoto wrote:
lazyday wrote:
KyleAAA wrote:Has the real return on REIT dividends really averaged -2%? S&P disputes that, at least since 2000. What is the source of that data?
Dividends per share have dropped over time.

https://www.researchaffiliates.com/cont ... dology.pdf

My bold:
only 7% of capital expenditures are funded through retained earnings; the remaining 93% are funded through the debt and equity
security markets. As REITs look to upgrade existing properties, or purchase new ones, they access funding sources
by issuing both debt and new shares.
Figure 4 displays real annual DPS since the start of the REIT index, along with a long-term and a shorter-term trend line. The long-term trend line shows an annual reduction in dividends per share of -3.7% per year. Much of the
drop in real DPS comes from the early 1970s, with slower negative growth in more recent times. The shorter-term
trend line shows that since 1990 real DPS payouts have fallen at a slower rate of -2.2% annually. This is the best
estimate of forward dilution (negative growth).
This analysis is nonsense. The dividend analysis was bizarre, to put it in a nice way. Most dividends are paid out after R&M and capex costs. In fact dividend returns are typically measured as a percentage of AFFO which is essentially free cash flow after capex. Suggesting you would take an addition 2% off the dividend yield for maintenance demonstrates a clear lack of basic accounting knowledge.

There are so many things wrong from the substitution of yield for cap rate, to the Capex assumption, the omission of leverage in the equation and how REIT's are utilizing leverage, replacement costs and so on. This is so bad in fact that I'm amazed it's still posted online.
From the quotes given it is clear that the authors mean a falling Dividend Per Share from REITs. They've measured it, and it is negative, long run.

How does that square with your critique?
Unless I'm missing something they measured it completely wrong.

Can anybody name a single REIT that has lower dividends per share today than they did 20 years ago?

There isn't one.

What they are claiming simply doesn't make sense and you can test it yourself. Pick 10 REITs at random. See what their dividends per share were ten, twenty years ago. The growth rate is usually over 5%! Just tested it with SPG and got 6% annualized dividend growth for the past twenty years.

Cantrip
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Re: Larry Swedroe on REITs

Post by Cantrip » Wed May 31, 2017 1:36 am

SPG, Simmons Property Group, #1 REIT in the Vanguard Index:
Current dividend is $7/share vs $1.92/share in 1994 (3.65x as high today as 24 years ago)
Inflation rate between 1993 and 2017 was ~2.22% per year, for 23 years that is 1.0222^23=1.66
Thus real dividend multiple increase has been 3.65/1.66= 2.20
Over the last 23 years, SPG has had a real annual dividend growth rate of 2.20^(1/23) = +4.3%

This looks like a good business to me, with the caveat that the US property price index which has a base of 100 in 2010 (soon after the real estate crash in 2009) was 53 in 1994 and is now 179 in 2017 (it was 8.5 in 1945). This index, which I am sure is correlated to rents, seems to increase more than inflation. Does anyone know if this is sustainable?

Consider share price:
1994 share price: $24, 8.0% dividend
2017 share price: $155, 4.5% dividend
Total dividend decrease of 8.0/4.5 = 1.78
Annual dividend growth rate of 1.78^(1/23) = -2.5%

With share price taken into account we see this negative annual dividend growth. But for comparison, 10 year treasury rates in 1994 was 5.75%. Today it is 2.21%. This is a difference of 3.5%, the *same* decrease in yield as SPG between 1994 and 2017. It appears to me that REITS are currently fairly valued.

My Questions:
REITs have had a similar return to stocks in the past 23 years, though it was a period of decreasing interest rates. Despite what REIT advocates say, when interest rates go up -- REITs go down in share price (the exception to this IMO was speculation in REITs, though it could happen again). I would be interested to hear what is known about the property price index in relation to REIT returns, as well as the rebalancing benefit of REITs with regard to portfolio bond percentage (it seems more bonds makes the rebalancing benefit of REITs less helpful in some backtests I've done).

Valuethinker
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Re: Larry Swedroe on REITs

Post by Valuethinker » Wed May 31, 2017 2:44 am

kosomoto wrote:
Valuethinker wrote:
kosomoto wrote:
lazyday wrote:
KyleAAA wrote:Has the real return on REIT dividends really averaged -2%? S&P disputes that, at least since 2000. What is the source of that data?
Dividends per share have dropped over time.

https://www.researchaffiliates.com/cont ... dology.pdf

My bold:
only 7% of capital expenditures are funded through retained earnings; the remaining 93% are funded through the debt and equity
security markets. As REITs look to upgrade existing properties, or purchase new ones, they access funding sources
by issuing both debt and new shares.
Figure 4 displays real annual DPS since the start of the REIT index, along with a long-term and a shorter-term trend line. The long-term trend line shows an annual reduction in dividends per share of -3.7% per year. Much of the
drop in real DPS comes from the early 1970s, with slower negative growth in more recent times. The shorter-term
trend line shows that since 1990 real DPS payouts have fallen at a slower rate of -2.2% annually. This is the best
estimate of forward dilution (negative growth).
This analysis is nonsense. The dividend analysis was bizarre, to put it in a nice way. Most dividends are paid out after R&M and capex costs. In fact dividend returns are typically measured as a percentage of AFFO which is essentially free cash flow after capex. Suggesting you would take an addition 2% off the dividend yield for maintenance demonstrates a clear lack of basic accounting knowledge.

There are so many things wrong from the substitution of yield for cap rate, to the Capex assumption, the omission of leverage in the equation and how REIT's are utilizing leverage, replacement costs and so on. This is so bad in fact that I'm amazed it's still posted online.
From the quotes given it is clear that the authors mean a falling Dividend Per Share from REITs. They've measured it, and it is negative, long run.

How does that square with your critique?
Unless I'm missing something they measured it completely wrong.

Can anybody name a single REIT that has lower dividends per share today than they did 20 years ago?

There isn't one.

What they are claiming simply doesn't make sense and you can test it yourself. Pick 10 REITs at random. See what their dividends per share were ten, twenty years ago. The growth rate is usually over 5%! Just tested it with SPG and got 6% annualized dividend growth for the past twenty years.
Hi

Falling in real terms, not nominal terms?

Note your test would suffer from survivor bias- you'd only be measuring the REITs that are still around. Also you would miss new REITs that listed since then.

If a REIT issues shares and keeps paying the dividend, you have still been diluted as a shareholder.

Valuethinker
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Re: Larry Swedroe on REITs

Post by Valuethinker » Wed May 31, 2017 2:48 am

Cantrip wrote:SPG, Simmons Property Group, #1 REIT in the Vanguard Index:
Current dividend is $7/share vs $1.92/share in 1994 (3.65x as high today as 24 years ago)
Inflation rate between 1993 and 2017 was ~2.22% per year, for 23 years that is 1.0222^23=1.66
Thus real dividend multiple increase has been 3.65/1.66= 2.20
Over the last 23 years, SPG has had a real annual dividend growth rate of 2.20^(1/23) = +4.3%

This looks like a good business to me, with the caveat that the US property price index which has a base of 100 in 2010 (soon after the real estate crash in 2009) was 53 in 1994 and is now 179 in 2017 (it was 8.5 in 1945). This index, which I am sure is correlated to rents, seems to increase more than inflation. Does anyone know if this is sustainable?
SPG was about the worst REIT that you could have picked!

The share price is in the tank over what is happening to retail malls (meltdown, except for the strongest malls).

Commercial property as a whole would grow with the economy, ie show real growth after inflation. However there would be big dispersions-- for example right now distribution centers are hot, but retail is in the tank because of the switch to online shopping, etc. Look at Macy's, Sears etc. closing anchor stores, calling the whole viability of malls into question when they do.


My Questions:
REITs have had a similar return to stocks in the past 23 years, though it was a period of decreasing interest rates. Despite what REIT advocates say, when interest rates go up -- REITs go down in share price (the exception to this IMO was speculation in REITs, though it could happen again). I would be interested to hear what is known about the property price index in relation to REIT returns, as well as the rebalancing benefit of REITs with regard to portfolio bond percentage (it seems more bonds makes the rebalancing benefit of REITs less helpful in some backtests I've done).
Look at the NACREIF data?

There's also trends in the underlying data-- REITs were heavily undervalued at the end of the 1990s and that undervaluation has been corrected (mirror of the dot com boom and bust).

Cap rates, which is fundamentally what drives their returns, have fallen very sharply and debt has gotten cheaper (they use leverage so this matters). It really depends whether one thinks those trends can be sustained.

Valuethinker
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Re: Larry Swedroe on REITs

Post by Valuethinker » Wed May 31, 2017 2:49 am

Valuethinker wrote:
kosomoto wrote:
Valuethinker wrote:
kosomoto wrote:
lazyday wrote:
Dividends per share have dropped over time.

https://www.researchaffiliates.com/cont ... dology.pdf

My bold:
This analysis is nonsense. The dividend analysis was bizarre, to put it in a nice way. Most dividends are paid out after R&M and capex costs. In fact dividend returns are typically measured as a percentage of AFFO which is essentially free cash flow after capex. Suggesting you would take an addition 2% off the dividend yield for maintenance demonstrates a clear lack of basic accounting knowledge.

There are so many things wrong from the substitution of yield for cap rate, to the Capex assumption, the omission of leverage in the equation and how REIT's are utilizing leverage, replacement costs and so on. This is so bad in fact that I'm amazed it's still posted online.
From the quotes given it is clear that the authors mean a falling Dividend Per Share from REITs. They've measured it, and it is negative, long run.

How does that square with your critique?
Unless I'm missing something they measured it completely wrong.

Can anybody name a single REIT that has lower dividends per share today than they did 20 years ago?

There isn't one.

What they are claiming simply doesn't make sense and you can test it yourself. Pick 10 REITs at random. See what their dividends per share were ten, twenty years ago. The growth rate is usually over 5%! Just tested it with SPG and got 6% annualized dividend growth for the past twenty years.
Hi

Falling in real terms, not nominal terms?

Mathematically (1+ nominal) = (1 + real) (1+inflation) or roughly real = nominal - inflation (that latter is an approximation and doesn't work too well for periods over say 1 year).

Note your test would suffer from survivor bias- you'd only be measuring the REITs that are still around. Also you would miss new REITs that listed since then.

If a REIT issues shares and keeps paying the dividend, you have still been diluted as a shareholder.[/quote]

Cantrip
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Re: Larry Swedroe on REITs

Post by Cantrip » Wed May 31, 2017 2:50 am

Changing this as Valuethinker answered some questions and gave me homework to do. Thank you, I enjoy your posts :).

Of note, Larry Swedroe states that Morningstar on March 31, 2017 listed the REIT index (VGSIX) P/CF as 7.0 which was 27% more expensive than overall market (VFINX) at 8.9. On May 31 (today) Morningstar now lists the REIT index (VGSIX) P/CF as 14.15 which is 23% cheaper than the overall market (VFINX) at 10.84!

lazyday
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Re: Larry Swedroe on REITs

Post by lazyday » Wed May 31, 2017 4:28 am

Cantrip wrote:SPG, Simmons Property Group, #1 REIT in the Vanguard Index:
Current dividend is $7/share vs $1.92/share in 1994 (3.65x as high today as 24 years ago)
Inflation rate between 1993 and 2017 was ~2.22% per year, for 23 years that is 1.0222^23=1.66
Thus real dividend multiple increase has been 3.65/1.66= 2.20
Over the last 23 years, SPG has had a real annual dividend growth rate of 2.20^(1/23) = +4.3%
Looking at figure 4 in my earlier link, 1994 is probably the best year of the 20th century to pick if you'd like to minimize the dilution of REIT dividends. But even still, figure 4 shows plenty of dilution since then. I'm not sure why the REITS you've looked at haven't shown a real drop in DPS. Valuethinker's survivorship bias idea is my best guess. If possible, you might try looking at DPS for the 5 REITS which were largest at the start of the time period, including any that no longer exist.

lazyday
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Re: Larry Swedroe on REITs

Post by lazyday » Wed May 31, 2017 4:37 am

This might be the data source for RA's figure 4 chart, if anyone wants to try to figure it out themselves:

https://www.reit.com/investing/index-da ... es-returns

From a quick look, it seems dividends per share have easily grown faster than inflation since 1972, but I'm probably making some fundamental mistake. I'm sure the most junior analyst who worked on that RA paper knows 10x more about this than I do.

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Re: Larry Swedroe on REITs

Post by magneto » Wed May 31, 2017 5:43 am

NiceUnparticularMan wrote: Just to be clear, it could well be that the correlation between REITs and common stocks is a variable (I consider that a near certainty). So I would say this study should give you reason for concern if your assumption was that REITs would ALWAYS have correlations with common stocks below a certain low threshold. If you were only hoping they would sometimes have somewhat lower correlations with common stocks, then this study might have much less impact on your planning.
A useful point !!!

Had another look at the REIT (and other) Real Estate holdings in our own portfolio.
As NUM more broadly hints; It seems that each position dances to its' own tune.
Some sometimes somewhat correlated with Stocks
Some sometimes definitely -vely correlated
Some sometimes no clear relationship discernable.
But what matters is the behaviour when severe Stock losses occur.
That day will be interesting.

In these difficult days of low, even -ve, real yields on Bonds what do we do?
So far our response is to employ a fair counter-balance of Cash (insurance), a smidgin of ST Corps, plus a good dollop of higher yielding Alternative Income (including RE), to eke out some sort of reasonable overall yield thereby maintaining or increasing the purchasing power of the non-stocks holding.
'There is a tide in the affairs of men ...', Brutus (Market Timer)

grok87
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Re: Larry Swedroe on REITs

Post by grok87 » Wed May 31, 2017 6:09 am

magneto wrote:
NiceUnparticularMan wrote: Just to be clear, it could well be that the correlation between REITs and common stocks is a variable (I consider that a near certainty). So I would say this study should give you reason for concern if your assumption was that REITs would ALWAYS have correlations with common stocks below a certain low threshold. If you were only hoping they would sometimes have somewhat lower correlations with common stocks, then this study might have much less impact on your planning.
A useful point !!!

Had another look at the REIT (and other) Real Estate holdings in our own portfolio.
As NUM more broadly hints; It seems that each position dances to its' own tune.
Some sometimes somewhat correlated with Stocks
Some sometimes definitely -vely correlated
Some sometimes no clear relationship discernable.
But what matters is the behaviour when severe Stock losses occur.
That day will be interesting.

In these difficult days of low, even -ve, real yields on Bonds what do we do?
So far our response is to employ a fair counter-balance of Cash (insurance), a smidgin of ST Corps, plus a good dollop of higher yielding Alternative Income (including RE), to eke out some sort of reasonable overall yield thereby maintaining or increasing the purchasing power of the non-stocks holding.
Also agree with NUMs point.

I think a lot of the recent market correlation has been driven by the fed (all risk assets going up together with quantitative easing, asset purchasses). It's tempting to say that when markets fall they (stocks, reits, bonds) will all fall together as well. the truth is "nobody knows nothing". We are in uncharted territory.

I think there is a good chance stocks, bonds and reits will behave differently during the next cycle.
Keep calm and Boglehead on. KCBO.

kosomoto
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Re: Larry Swedroe on REITs

Post by kosomoto » Wed May 31, 2017 9:02 am

Valuethinker wrote:
kosomoto wrote:
Valuethinker wrote:
kosomoto wrote:
lazyday wrote:
Dividends per share have dropped over time.

https://www.researchaffiliates.com/cont ... dology.pdf

My bold:
This analysis is nonsense. The dividend analysis was bizarre, to put it in a nice way. Most dividends are paid out after R&M and capex costs. In fact dividend returns are typically measured as a percentage of AFFO which is essentially free cash flow after capex. Suggesting you would take an addition 2% off the dividend yield for maintenance demonstrates a clear lack of basic accounting knowledge.

There are so many things wrong from the substitution of yield for cap rate, to the Capex assumption, the omission of leverage in the equation and how REIT's are utilizing leverage, replacement costs and so on. This is so bad in fact that I'm amazed it's still posted online.
From the quotes given it is clear that the authors mean a falling Dividend Per Share from REITs. They've measured it, and it is negative, long run.

How does that square with your critique?
Unless I'm missing something they measured it completely wrong.

Can anybody name a single REIT that has lower dividends per share today than they did 20 years ago?

There isn't one.

What they are claiming simply doesn't make sense and you can test it yourself. Pick 10 REITs at random. See what their dividends per share were ten, twenty years ago. The growth rate is usually over 5%! Just tested it with SPG and got 6% annualized dividend growth for the past twenty years.
Hi

Falling in real terms, not nominal terms?

Note your test would suffer from survivor bias- you'd only be measuring the REITs that are still around. Also you would miss new REITs that listed since then.

If a REIT issues shares and keeps paying the dividend, you have still been diluted as a shareholder.
Except they clearly state dividends have been falling in nominal terms, they state "real DPS growth = historic DPS growth" which is just silly since "real" means something entirely different in the investing world. More and more I'm guessing an intern wrote this paper.

Sure, survivorship bias plays a role here, but I still haven't seen any data that backs up the idea that REIT dividends per share decrease over time. The notion itself seems insane.

kosomoto
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Re: Larry Swedroe on REITs

Post by kosomoto » Wed May 31, 2017 9:12 am

lazyday wrote:This might be the data source for RA's figure 4 chart, if anyone wants to try to figure it out themselves:

https://www.reit.com/investing/index-da ... es-returns

From a quick look, it seems dividends per share have easily grown faster than inflation since 1972, but I'm probably making some fundamental mistake. I'm sure the most junior analyst who worked on that RA paper knows 10x more about this than I do.
Returns and dividend yields from that data are given as percents per the top of the excel chart so I don't think that provides the dividends per share data they used. I still have no idea where they got there data and since it flies in the face of reality I won't believe it until I see it for myself and I can replicate it.

kosomoto
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Re: Larry Swedroe on REITs

Post by kosomoto » Wed May 31, 2017 9:37 am

In 1997 the dividends paid by Vanguard REIT Index Fund Investor Shares (VGSIX) were 77 cents per share.

In 2016, the dividends were 1.28 per share.

This is a growth of around 2.5% annualized.

Still confused as to how dividend growth was negative, I asked reit.com to provide dividend per share growth information for REITs but I'm pretty sure it will end up being positive.

betablocker
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Re: Larry Swedroe on REITs

Post by betablocker » Wed May 31, 2017 10:39 am

The main point here is that REITs have gone up in price and in correlation to stocks just as stocks are becoming over valued. Using them as a diversifier doesn't make as much sense as it used to especially when there are other sources of diversification (factors, alt lending, reinsurance, etc.) out there.

kosomoto
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Re: Larry Swedroe on REITs

Post by kosomoto » Wed May 31, 2017 10:55 am

betablocker wrote:The main point here is that REITs have gone up in price and in correlation to stocks just as stocks are becoming over valued. Using them as a diversifier doesn't make as much sense as it used to especially when there are other sources of diversification (factors, alt lending, reinsurance, etc.) out there.
I think people are taking issue with the notion that REITs are overvalued. Sure, their dividend yield has dropped since the 70s but yields have fallen on literally everything since then. The 70s and 80s had a ton of inflation. REITs are trading at their recent average level of P/FFO and NAV. The broad market is well above its recent averages, implying REITs are undervalued. The exact opposite conclusion Swedroe has.

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Johnnie
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Re: Larry Swedroe on REITs

Post by Johnnie » Wed May 31, 2017 11:15 am

Guilty.

I own VG's REIT fund and I really don't understand the asset class. Do higher rates make it go up or down? Is it economically counter-cyclical or cyclical? Add other questions that I don't know enough to ask.

This is the only asset class I own that I don't really understand. I added it because it's part of the Merriman ultimate equity portfolio model I've adopted, and he says it's non-correlated in useful ways.

Because I don't understand REITs and suspected valuations are high I've been DCAing via 401k contributions, a 2-3 year process. After reading the article I'm wondering about instead allocating a portion to international REITs (40%, same as my other equities). I think I heard Merriman say in a recent podcast that he's doing some of this himself.

I am very sensitive and adverse to changing plans in midstream, but this one feels reasonable and timely.
"I know nothing."

lazyday
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Re: Larry Swedroe on REITs

Post by lazyday » Wed May 31, 2017 11:24 am

kosomoto wrote:In 1997 the dividends paid by Vanguard REIT Index Fund Investor Shares (VGSIX) were 77 cents per share.

In 2016, the dividends were 1.28 per share.
From https://fred.stlouisfed.org/series/CPIAUCNS 1998-01-01 to 2017-01-01 CPI increased from about 162 to 243.

If my math is right, inflation was

(243/162) ** (1/19)

using your data, Vanguard fund DPS increased

(1.28/.77) ** (1/19)

you can google the expressions above which solves them. Inflation 2.2%, DPS growth 2.7% nominal.

Looking at figure 4, there should have been nearly a 2.2% reduction in real DPS over that period.

Are we thinking about this correctly? If I have time, I'll try to revisit the Gordon growth model, and think about expectations of someone who bought VGSIX on Jan 1 1998 and doesn't plan to reinvest dividends. I don't think we would literally subtract out expected dilution, if we are to estimate expected dividend growth after dilution which DPS should do. Subtracting dilution from the 2.7% figure above would seem to be double counting the dilution.

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Re: Larry Swedroe on REITs

Post by garlandwhizzer » Wed May 31, 2017 12:00 pm

kosomoto wrote:
In 1997 the dividends paid by Vanguard REIT Index Fund Investor Shares (VGSIX) were 77 cents per share.

In 2016, the dividends were 1.28 per share.

This is a growth of around 2.5% annualized.
There are two factors to take into account in this. One is share price. In 1997 the share price of VGSIX was about $12.50. By the end of 2016 the share price got up to about $30.00. In short the share price rose by 240% and the dividend according to your numbers rose by 166%. This implies that every dollar invested in 1999 paid about 50% more in dividends than a dollar invested in 2016 NOT INCLUDING INFLATION. In real inflation adjusted dollars compounded since 1999 we have to reduce that by another approximately 50%. So in real terms for every dollar invested in VGSIX in 2016 pays 25% of the dividends that it paid in 1999. But it gets worse. Much of the current distributions of the VGSIX currently come not from dividends generated by ongoing real estate operations but from "return of capital" which means sales of assets and "long term capital gains" which may or may not persist in the future.

The following is Vanguard's quote on VGSIX's current distributions.
The current unadjusted effective yield is 3.91% as of 04/30/2017, which is based on the full amount of REIT distributions (dividend income, as well as return of capital and capital gain).

The current adjusted effective yield is 2.48% as of 04/30/2017. The adjusted yield reflects a reduction in the income included in the yield based on the average return of capital and capital gain distributions received from the fund's REIT investments for the past 2 calendar years. (These percentages are 40.94% for 2016 and 29.91% for 2015.)
The effective yield, the distribution based on how much income is generated by ongoing real estate operations is less than 2.5% much less than the Vanguard High Dividend Fund and only marginally better TSM. More than 40% of the 2016 distribution came from non-recurring items. At times in the late 1990s that figure was close to 9%. Larry is totally right that US REITS are at least as overvalued, probably more so, than US equities as whole IMO.

Garland Whizzer

kosomoto
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Re: Larry Swedroe on REITs

Post by kosomoto » Wed May 31, 2017 12:11 pm

garlandwhizzer wrote:
kosomoto wrote:
In 1997 the dividends paid by Vanguard REIT Index Fund Investor Shares (VGSIX) were 77 cents per share.

In 2016, the dividends were 1.28 per share.

This is a growth of around 2.5% annualized.
There are two factors to take into account in this. One is share price. In 1997 the share price of VGSIX was about $12.50. By the end of 2016 the share price got up to about $30.00. In short the share price rose by 240% and the dividend according to your numbers rose by 166%. This implies that every dollar invested in 1999 paid about 50% more in dividends than a dollar invested in 2016 NOT INCLUDING INFLATION. In real inflation adjusted dollars compounded since 1999 we have to reduce that by another approximately 50%. So in real terms for every dollar invested in VGSIX in 2016 pays 25% of the dividends that it paid in 1999. But it gets worse. Much of the current distributions of the VGSIX currently come not from dividends generated by ongoing real estate operations but from "return of capital" which means sales of assets and "long term capital gains" which may or may not persist in the future.

The following is Vanguard's quote on VGSIX's current distributions.
The current unadjusted effective yield is 3.91% as of 04/30/2017, which is based on the full amount of REIT distributions (dividend income, as well as return of capital and capital gain).

The current adjusted effective yield is 2.48% as of 04/30/2017. The adjusted yield reflects a reduction in the income included in the yield based on the average return of capital and capital gain distributions received from the fund's REIT investments for the past 2 calendar years. (These percentages are 40.94% for 2016 and 29.91% for 2015.)
The effective yield, the distribution based on how much income is generated by ongoing real estate operations is less than 2.5% much less than the Vanguard High Dividend Fund and only marginally better TSM. More than 40% of the 2016 distribution came from non-recurring items. At times in the late 1990s that figure was close to 9%. Larry is totally right that US REITS are at least as overvalued, probably more so, than US equities as whole IMO.

Garland Whizzer
1. We calculated the dividend growth rate and inflation, see above. Dividend growth remained positive, but lower than the broad market.

2. You need to exclude return of capital from the total market dividends in order to have a fair comparison. REITs still have a higher yield than the broad market after accounting for return of capital.

3. What support do you have for REITs being overvalued? I showed two graphs showing they are undervalued based on recent NAV discounts and currently in line in regards to P/FFO. The total market is trading at higher valuations than recent history, implying REITs are undervalued compared to the total market.

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Re: Larry Swedroe on REITs

Post by lazyday » Wed May 31, 2017 12:20 pm

kosomoto, do you have a link for your dividend data? Is it dividends or total distributions?

Even if it's total distributions, we might not be done, as I imagine that if we instead only use the actual dividends when calculating DPS we should reinvest the return of capital.

kosomoto
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Re: Larry Swedroe on REITs

Post by kosomoto » Wed May 31, 2017 12:27 pm

lazyday wrote:kosomoto, do you have a link for your dividend data? Is it dividends or total distributions?

Even if it's total distributions, we might not be done, as I imagine that if we instead only use the actual dividends when calculating DPS we should reinvest the return of capital.
Sure, here is a link:

https://www.dividendinvestor.com/dividend-history/

You can input whatever fund you want into it to get data.

I imagine it is total distributions including the return of capital. I am at work so I can't check now but an easy way to check would be to compare 2015's distribution data to what is shown on Vanguard.

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