Is It Safe? Vornado's Hidden Dividend Cut

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People invest in real estate investment trusts to reap rich cash dividends. But Vornado Realty Trust(VNO Quote) shareholders haven't been so lucky lately.

In January, Vornado started paying 40% of its dividend in cash and the rest in stock to shore up its balance sheet. That means investors who previously received 95 cents a share in cash are getting 41.5 cents in cash and 53.5 cents of Vornado stock. The 12% drop in Vornado's stock this year has added to the sting, especially compared with the 2.1% gain of the S&P 500 Index.

Vornado, whose properties include 50 buildings in New York, has been hit hard by the falling value of commercial real estate. Investors will feel the pinch through a 3% cash dividend yield, which is down from 6.85% in the past year. A return to all-cash payouts is unlikely until real estate prices and occupancy rates improve.

The economic slump has taken its toll on real estate investment trusts, also known as REITs. In addition to falling property values, the industry loaded up with debt in recent years, much of which will need to be paid down or refinanced in the next three years.

REITs are required to pay 90% of their income to shareholders as dividends. Weak earnings have made it difficult for Vornado to keep up with its hefty payout.

On Wednesday, Vornado said first-quarter earnings dropped 67% to 79 cents a share from $2.38 a year ago. Funds from operations, a key profit gauge for REITs, tumbled to $1.63 from $3.27 in the first quarter.