Real Estate Investment Trusts (REITs) are considered excellent long-term investments. There are two underlying reasons. First, under the Internal Revenue Code, they are considered income tax free investments. To comply, the REIT must distribute at least 90% of all net income earned to shareholders. The shareholders pay income tax on those dividends received. Because of the dividend distribution requirement, REITs have excellent dividend yields. This is why REITs are considered perfect investments for widow and orphan funds whereby cash is necessary to fund the monthly payments to annuitants. Secondly, similar to any real estate investment, time is beneficial to the overall value of the REIT’s fixed assets.
This in-depth article explains these two elements of real estate ownership and how they are applied to publicly traded REITs. The dividend yield formula is covered in detail and how it is applied with REITs due to the every increasing dividend payout REITs generate. Net income is then covered and an actual example is illustrated discussing how to interpret annual and interim income statements REITs provide. There is also an explanation to calculating cash flow related to the income statement. Finally, with regard to the underlying assets of real estate, the fixed assets turnover rate is explained and how it is applied to REITs. There is an expected norm for the turnover rate.
From this information, buy/sell trigger points are covered along with an example for a club member.