Bought a REIT for the 8.9 percent yield, dividend cut in month four

Writing this down because I made the mistake that everyone warns about and I want to be specific about how it actually felt from the inside.

I put 26k into a single REIT last year. The reason was the yield, 8.9 percent, against a sector where most things I looked at were between 3 and 5. I told myself I'd found something the market was mispricing. What I'd actually found was a market that had already decided the dividend wasn't safe.

What I didn't do: I never compared the dividend per share to the funds from operations per share. If I had, I'd have seen the payout was running above what the properties generated, and had been for more than a year. That's a two-line calculation in a public filing and I skipped it because the yield number was already doing my thinking.

Month four, the dividend was cut by roughly 45 percent. The share price dropped about 18 percent the same week, because the yield had been the only reason anyone was holding it. So I lost income and principal in the same motion. On 26k I'm down about 4,700 in price and my annual income from the position went from around 2,300 to about 1,300.

I still own it, which may be its own mistake. I don't have a reason to hold besides not wanting to realize the loss, and I know that's not a reason.

What I'd do differently, plainly: check the dividend against FFO before I look at the yield at all. And I would not put 26k into one name again, whatever the number on the screen said.

3 replies

-1kevin_lombardPG1BPRO5

Still fuzzy on this after going back through the thread. Can someone explain FFO in plain terms? I understand net income and I don't understand why REITs use a different number.

-1tonyv88SO4CPRO6

@juniper depreciation. Accounting rules make you write down the value of a building a bit every year as an expense, which drags net income down hard for a company whose whole balance sheet is buildings. In reality a well-maintained building often isn't losing value at that rate. Funds from operations adds the depreciation back and takes out gains from selling properties, so you get closer to the cash the portfolio actually threw off. It's not perfect and different companies calculate it slightly differently, so read the definition in the filing.

@anchor the sentence that matters in your post is that the yield was the only reason anyone held it. When that's true the price has nowhere to go once the payout moves.

2nataliehsuSO1BPRO7

The part I keep coming back to is 26k in one name. The dividend cut is the visible failure and the concentration is what made it expensive. Same mistake with 4k in it is a lesson instead of a loss.

On still holding it, I'd separate two questions. Whether you'd buy it today at today's price with today's payout. If the answer is no, the fact that you already own it doesn't change anything.

Bought a REIT for the 8.9 percent yield, dividend cut in month four

3 replies