The Characteristics of REIT Dividends — Why Are They So High?
REITs have unusually high dividend yields. Not out of generosity, but because the law is set up to make them do so. And behind that lie conditions and risks you should know about.
Why REITs Pay Large Dividends
A REIT (Real Estate Investment Trust) is a structure that pools money from many investors, invests it in real estate, and returns the rental income and sale gains as dividends.
The key is the tax-benefit condition. A U.S. REIT must pay out more than 90% of its taxable income as dividends to be exempt from corporate tax (in practice, most pay close to 100% to avoid tax on residual income). Korea likewise, under the Real Estate Investment Company Act, exempts REITs from corporate tax in exchange for mandatorily paying out more than 90% of distributable income. In other words, a REIT's high dividend is closer to an "obligation" than a "choice."
Stability and Its Limits
Thanks to mandatory dividends, REITs tend to provide relatively steady dividends like bonds. That is because rent, a predictable cash flow, is the basis of the dividend.
But a large dividend does not mean there is no risk. Because REITs send out most of their earnings as dividends, they have limited room to grow through retained earnings and often raise growth capital by issuing stock or debt. So when interest rates rise, the burden of interest and a decline in real estate values can combine to pressure both the share price and the dividend.
REITs are not free from economic and interest-rate shocks either. During financial crises and periods of sharp rate increases, REIT share prices fell sharply, and some even cut their dividends.
The Tax Burden Is Relatively Heavy
REIT dividends can be tax-disadvantaged. In the United States, a substantial portion of REIT dividends often fails to receive the preferential qualified-dividend rate and is taxed at ordinary income tax rates.
For Korean investors too, REIT dividends are charged a 15.4% dividend income tax, and if the sum of interest and dividends exceeds 20 million won per year, they become subject to comprehensive financial income taxation. Because REIT dividends are large, it is relatively easy to reach this comprehensive-taxation threshold. You should look at the tax burden behind the high dividend yield together.
Frequently Asked Questions
Q. Since REITs pay large dividends, are they a safe asset?
The dividend is fairly steady, but it is not a safe asset. REITs are sensitive to real estate and interest rates, so their share prices can fall sharply during periods of surging rates or a real estate downturn, and there are cases of dividend cuts. You should note that "high dividend" does not equal "safe."
Q. Is the tax on REIT dividends different from that on regular stock dividends?
In the United States, much of REIT dividends fails to get the preferential qualified-dividend rate and is taxed at ordinary rates. For Korean investors, both follow the 15.4% withholding and comprehensive-taxation system, but because REIT dividends are large, they can hit the comprehensive-taxation threshold quickly.
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